21 March 2000
REV3 Boosting Productivity and Fairness: Employee Share Ownership
Improvements to the new all-employee share plan were announced today following a further period of consultation. The plan is now more attractive to companies of all sizes and easier to operate.
The rules for SAYE Sharesave and the Company Share Option Plan (CSOP) remain as they are. The Approved Profit Sharing (APS) scheme is to stay until 2002, but then employers will have to move their APS schemes into new plans, if they have not already done so, for tax breaks to continue.
Financial Secretary Stephen Timms said :
?This new plan is a cornerstone of the drive to tackle the productivity gap and promote a high investment Britain, a Britain where we reward enterprise and provide fairness for all. Only by pursuing both enterprise and fairness together can we equip Britain for the future and secure rising living standards for everyone.
This is why employee share ownership is so important to this Government and why we have put in place a range of measures to promote employee share ownership that is unparalleled in the world.?
To help smaller companies, the number of employees who can be granted options under the new Enterprise Management Incentives will be increased to 15.
DETAILS
The new plan in outline
- Employers can give employees up to £3,000 of shares each year free of tax and National Insurance, and
- Some or all of these shares can be awarded to employees for reaching performance targets
- Employees will be able to buy partnership shares out of their pre-tax salary, up to a maximum of £1,500 a year, free of tax and National Insurance
- Employers can match partnership shares by giving employees up to 2 free shares for each partnership share they buy.
The new plan - the improvements
- Companies will get corporation tax relief for the costs they incur in providing shares for employees to buy to the extent such costs exceed the employees? contributions
- Shares held in a qualifying employee share ownership trust (QUEST) on Budget Day can be transferred to a new plan trust without losing the corporation tax relief already given on the contribution made to the QUEST to buy the shares
- Companies can award free shares in respect of performance periods that begin before the 2000 Finance Bill becomes law
- As a transitional measure - companies can run an APS scheme alongside a new plan that provides partnership shares
- A simplification for trustees - employers can operate PAYE and account for National Insurance
- The dividend re-investment limits are simplified - up to £1,500 of dividends may be re-invested in shares tax free each year
- The time limit for providing information to the Inland Revenue is extended from 30 days to 3 months
- The 30 day time limit for taking shares out of the trust when employees leave is replaced by a new rule which gives employees and trustees freedom to make their own arrangements about transferring the shares
Improvements specifically to help smaller companies
- A new capital gains roll-over relief for existing shareholders who want to sell their shares to a new plan trust to be used for the benefit of employees
- The existence of arrangements to enable employees to sell shares held in a new plan trust will not of itself make those shares readily convertible into cash and require employers to operate PAYE and account for National Insurance
Implementation from April
- Companies will be able to send in draft plans for approval under a fast track approvals process
- There will be a dedicated Helpline for initial queries
- For those seeking more guidance, there will be detailed help, including model rules and trust deeds, on the Revenue's share schemes web page around the time the Finance Bill is published.
External links
The new plan will eventually cost around £400 million a year and it is expected that around 450 employers are expected to use the plan to set up their first all employee share scheme. As a result more than 500,000 employees will own shares in their company for the first time. The total number of employees having shares in a new plan is estimated to reach 2.5 million in the next 3 to 5 years.
The existing approved schemes
- SAYE Sharesave (SAYE) and the Company Share Option Plan (CSOP) are to continue unaltered
- No further tax free awards can be made under the Approved Profit Sharing (APS) from April 2002
- Provisions in the Finance Bill will prevent the use of the APS and the new plan in arrangements designed to replace Profit-Related Pay rather than give employees a continuing stake in the business
Over 1,200 companies have a SAYE scheme and around 1.75 million employees participate in these. This scheme currently costs in the region of £600 million a year. Around 3,750 companies have a CSOP with some 450,000 employees holding options. CSOP costs in the region of £130 million a year. Fewer than 900 companies have an APS with some 1.25 million participants. It is expected that the vast majority of companies with APS schemes will replace this with the new plan.
NICs and unapproved share option gains
NICs are charged on gains arising when share options are exercised outside an Inland Revenue approved scheme and the shares are readily convertible into cash. Many e-commerce and high tech companies offer their employees substantial share options as part of their remuneration package. While employers can plan for NICs on regular pay, it is much less easy for them to plan for NICs on share options, particularly where the share price is volatile. Employers have expressed concern that their exposure to unpredictable NICs liability in these circumstances could put at risk their investment strategies, damage their future growth by deterring investors and even make them insolvent.
At present, employers would be statutorily barred from asking their employees to reimburse their NICs liability, even where share prices have risen substantially and employees have realised large share option gains but the employing company does not yet have a track record of profitability.
The Government has received suggestions that employers? exposure to these difficulties could be resolved, for example by allowing a voluntary agreement between employer and employee that:
- All the employer's NICs liability on unapproved share option gains will be met by the employee,
- Part of the employer's liability on these gains, or the excess above a predetermined amount, will be met by the employee, or
- The employer's NICs liability is to be met by the employee but, by mutual agreement, the employer could take on the statutory liability at the time it is incurred.
All three suggestions would give employers, particularly those with high growth potential, much more certainty about their exposure to NICs liability. The Government is attracted to improving flexibility in this area for business and is considering legislation. It is also implementing a number of changes which particularly help employees in high growth companies. These include Enterprise Management Incentives, to attract ?hard to recruit? people in companies with high growth potential, and the reform of CGT, benefiting all employees holding shares in their employer. Any views on these suggestions should be sent to the Financial Secretary Stephen Timms, (NICs and Share Options), HM Treasury, Treasury Chambers, Parliament Street, London SW1P 3AG.
NOTES FOR EDITORS
1.Over 150 responses were received on the draft legislation for the new plan which was published in November. While the main concern was the future of SAYE, respondents were overwhelmingly in favour of the new plan. Many respondents commented positively on the flexibility of the plan, although others were worried about possible complexity. The changes announced today address many of the concerns raised. A number of drafting and technical suggestions on the detail of the legislation have been adopted to make it easier to understand.
2.Under the new plan:
- Employees who keep their shares in the plan for five years will pay no income tax or National Insurance in respect of those shares
- Employees who keep their shares in the plan for three years will only pay income tax and National Insurance on the initial value of the shares - any increase in the value of their shares will be tax free
- Employees who keep their shares in the plan until they sell will have no capital gains tax to pay. If they take them out and sell later, they will pay capital gains tax only on any increase in value after the shares come out of the plan
- Shares have to come out of the plan when employees leave their job. Companies can decide that employees lose their free shares if they leave within three years
3.Companies will be able to transfer any shares already held in a qualifying employee share ownership trust (QUEST) to a new plan trust. This will apply to:
- All shares in the company held in the QUEST on Budget day, and
- Cash held by the QUEST on Budget day provided this is used to acquire shares in the company.
4.Shares fulfilling these requirements transferred to a new plan trust will be treated as ?qualifying transfers? under Section 69 Finance Act 1989. As a result there will be no clawback of any earlier corporation tax relief. Shares transferred to a new plan trust from a QUEST must be used as either free or matching shares under the normal rules of the plan.
5.Under Enterprise Management Incentives (EMI):
- Independent trading companies with gross assets not exceeding £15 million will be able to reward up to 15 key employees with tax-advantaged share options, each receiving options worth up to £100,000 at the time of grant;
- There is no tax on the grant of the option and there will be normally no tax or National Insurance for the employee to pay when the options are exercised; nor will there normally be any National Insurance charge for the employer
- When the shares are sold, CGT taper relief will normally start from the date the options are granted
- Red tape will be cut by using a simple notification process rather than the normal approvals system.
6.The Inland Revenue estimates that over 2,500 companies will take up EMIs over the first three years at a cost of around £45 million a year to the Exchequer by 2005-06. The Government intends to review EMI after 5 years to see if it is fulfilling its purpose and aims.
7. The Inland Revenue approved share schemes are:
- SAYE Sharesave (or SAYE) - employees are granted options at a discount of up to 20% at the start of a savings contract. Employees can save a fixed monthly amount of between £5 and £250 for 3, 5 or 7 years. At the end of the savings contract a tax-free bonus is payable. Employees use the proceeds of the savings contract, including the bonus, if they want to exercise the option. If they do not, the proceeds are repaid in cash, tax free. There is no tax or National Insurance charged on the discount or on the gain made when the option is exercised
- Company Share Option Plan (CSOP) - employees are granted options to acquire shares at the market price at the time of grant. Employees may be granted options over shares worth up to £30,000 at any one time. There is no tax or National Insurance charged on the gain made when the option is exercised, provided that the options are held for at least 3 years and there is a gap of at least 3 years between each tax-relieved exercise
- Approved Profit Sharing (APS) - employees are awarded free shares up to the value of £3,000 a year or up to 10% of salary up to a maximum of £8,000, whichever is greater. The shares must be left in a trust for 2 years but can be taken out after 3 years free of tax and National Insurance.
8. Under proposals announced today:
- New APS schemes will continue to be approved where applications for approval are received by the Revenue before 6 April 2001
- Tax-free awards of shares under APS schemes will be allowed up to 5 April 2002
- Companies may claim a deduction under Section 85 ICTA 1988 for contributions made to an APS trust up to and including 5 April 2002 provided the trustees use these contributions to acquire shares and those shares are awarded to employees within 9 months of the end of the accounting period in which the contribution is made or 5 April 2002, whichever is earlier
9.Other proposals having effect from today stop arrangements intended to replicate the effect of Profit Related Pay (PRP) by using arrangements involving an APS. Tax free PRP has been phased out and is now no longer available for any PRP periods starting on or after 1 January 2000. These arrangements take a variety of forms, but typically seek to provide employees with tax free cash, either at the end of 3 years or monthly through the use of loan arrangements, and/or through the use of shares with unusually restricted rights which may be shares in a service company. As of today:
- Companies will not be able to use in APS schemes shares in companies where the employees perform services for a business carried on by a third party unless the employer company is an independent business. Shares in these companies already held by trustees of approved APS trusts on Budget day will continue to get the benefit of tax relief under Section 186 ICTA 1988
- Companies will not normally be able to use shares with more limited rights than those which apply to all ordinary shares of the company, and
- Where a loan facility is provided by reason of the employment the Revenue may withdraw approval of the plan if the loans are used as part of arrangements to provide employees with tax free cash rather than a continuing stake in the company.
10. Similar provisions will also be included in the legislation for the new plan.
11. The Inland Revenue has published today a revised draft Regulatory Impact Assessment (RIA) on the costs and benefits arising from the new plan and would welcome any comments. The Inland Revenue has also published today a final RIA on the costs and benefits arising from Enterprise Management Incentives. Again, comments are welcome. Copies of both RIAs may be obtained from:
Richard Lambert Room
138 New Wing
Somerset House
Strand
London WC2R 1LB
The RIAs are also available on the Inland Revenue's website
External links
INLAND REVENUE PRESS OFFICE
Media enquiries to: 020 7438 6692/6706/7327 (Out of hours: 07860 359544)
Non-media enquiries to: 020 7438 6420/6425 (Office hours only)
External links
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