Employee ownership is alive and well but further HMRC cuts could inhibit growth

07 June 2016

Fiona Bell

Recent reports in the national press suggesting that the Government is withdrawing its support from the ‘John Lewis’ model of employee ownership are vastly overstated, but further cuts to the services offered by HMRC to such businesses could inhibit further growth in the sector.

'Never knowingly undersold' is an important term when it comes to employee share schemes. Of course it is the well-known policy of The John Lewis Partnership, one of the best known employee owned companies in the UK.

It is also a concept that is important to ensure there are no unintentional tax and national insurance bills to pay when shares are sold or awarded to employees.

Her Majesty's Revenue and Customs have been very helpful in recent years agreeing the price of employment related securities (employee shares) so employees and employers know whether the shares are discounted (which generally gives rise to tax and national insurance liabilities) or at the market value (typically tax neutral). However, they have recently withdrawn the service in connection with certain arrangements and there is a risk they may remove the service for more. It's cost-cutting.

There are six* tax advantaged employee schemes established by statutory provisions to encourage employee ownership. Many of these plans represent a long history of Government support for employee share ownership through tax reliefs. In fact one of these (CSOPs) can trace its origins back to the 1960s. More recently ESS and EOTs were introduced in 2013 and 2014 respectively.

Of these six schemes, HMRC will give prior agreement to share values for five. The only exception is the sale of shares by owners to an EOT.

HMRC previously agreed values for other share scheme arrangements, after the event (known as post-transaction value confirmations or PTVC), but they stopped that at the end of March 2016. This is regrettable as it was helpful, but HMRC's reasoning appears to be that virtually 90 per cent of values were agreed as acceptable, the cost of the service is high and because (presumably) it didn't raise much revenue. Understandable when budgets are being cut but we have to voice concern about the risk that further cuts will remove the valuation agreements for statutory tax advantaged plans.

On the whole, the part of HMRC that values shares for employee share schemes is efficient and effective and very helpful to employers (who want to know if there is a PAYE/NIC responsibility) and employees (who need to know how much a share scheme is going to cost them before they make an investment decision).

Government has supported employee ownership arrangements at least since the 1960s. This change to the valuation service does not suggest it is losing government support but it should not be further eroded by cuts inhibiting opportunities for employees to own and have a voice in their companies. 

*Company share ownership plans (CSOPs), enterprise management incentives (EMIs), share incentive plans (SIPs), save as your earn aka sharesave plans (SAYEs), employee shareholder status (ESS) and employee ownership trusts (EOTs).

For more information please get in touch with Fiona Bell, or your usual RSM contact.