In Chancellor Philip Hammond’s first and final Autumn Statement, an unexpected change came in the form of the removal of all tax reliefs for “employee shareholder” shares (“ESS”).
This will take effect where the employee shareholder agreement has not been entered into before 1 December 2016, or, where independent advice was taken on 23 November before 1.30pm, before 2 December 2016.
Because of the requirement for a seven-day waiting period between independent advice being given and the agreement being entered into, this will effectively remove all tax relief for ESS where independent advice had not been taken before 1.30pm today.
Where independent advice has been taken, and the ESS agreement is entered into by the deadline, the reliefs will still be available even if the actual issue of shares is delayed.
The Chancellor described this move as a result of the use of ESS to provide tax relief rather than as a means to create a more flexible workforce, as was intended. However, following the cap on ESS relief to provide exemption from capital gains tax only up to a maximum gain of £100,000, few participants have considered the tax reliefs available a significant factor.
ESS has, since last March, been the only way other than EMI (for which many companies are not eligible) to agree the value of a share award with HMRC. Valuation of shares in a private company where there is no ready market is often a difficult area and the certainty provided by ESS has been important to employers and participants – as, otherwise, there is little to prevent HMRC opening an enquiry up to four years later suggesting income tax should have been operated on a higher value as at the time of the award.
We note that ESS itself has not been abolished – presumably as this will require changes to the Employment Rights Act as well as the tax legislation – although the Chancellor has indicated an intention to do so in the future. As such, this suggests there may be a window available in which valuations may be agreed with HMRC for ESS purposes, in order to ensure participants receive the required minimum £2,000 of shares in exchange for giving up the specified employment rights.
Going forward, once ESS is removed, it will no longer be possible to agree share valuations with HMRC for discretionary awards where EMI is not available. This will make independent valuation advice for private companies making employee share awards key, so that employers have robust contemporary evidence as to the basis on which tax was paid, making it difficult for challenges to be raised in the future where hindsight might suggest a greater value than was apparent at the time.
Pett, Franklin & Co. LLP are experts in employee share schemes, share valuations and executive incentives. To find out how we can help you or your client, please contact Stephen Woodhouse on 0121 348 7878 or at firstname.lastname@example.org.