Growth shares require the creation and issue of a new class of shares which have the rights to the growth in the value of the company above a threshold.

JSOPs also give employee joint owners the value above a threshold but use an existing class of shares. Depending on which is more convenient the jointly owned shares may either be existing shares or new issued shares of an existing class. Because a new share class is not being created they are less flexible than the growth shares. In essence the HR aims of the award have to fit within the standard rules of a JSOP whereas for a growth share potentially the growth share can be designed to fit around the HR aims. But increasingly this flexibility for growth shares is a double-edged sword because it risks the creation of a financial instrument that is too complex or difficult to value and so may lack resilience in the event of an HMRC look back valuation review.

JSOPs require a joint or co-owner with the employee. Normally the joint owner is a trust although another shareholder could be the joint owner. The involvement of the trust creates the complications of another party being involved and growth shares do not require this extra party.

For a close company the funding of the trust to acquire further shares for joint ownership cannot because of an additional tax cost normally be structured as a repayable loan from the company but has to be structured as a non-returnable contribution by the company. This means that when the jointly owned shares are sold the value that belongs to the trust cannot be returned to the company by way of a loan repayment and so the value is held within the trust and essentially available only for the benefit of employees i.e. not for the company as a whole or the other shareholders.

With growth shares the shareholder only gets the growth in value above a threshold and the rest of the value of the company is automatically shared out amongst all the other shareholders.

There are important valuation similarities and differences between growth shares and JSOPs. Both awards involve the employee receiving an employment related security and its market value is subject to employment taxes at the outset. But this market value can no longer be agreed upfront with HMRC and so is subject to a potential look back valuation review by HMRC in the future.

Both growth shares and JSOPs require as a building block for their own valuation a valuation of the company.

The valuation of growth shares is a contentious subject and HMRC are on record as saying that nil or negligible values agreed for growth shares by them in the past had sometimes been agreed in error. HMRC can argue with some force that it is hardly likely that the company would go to all the trouble of creating a new class of shares and changing its articles solely to incentivise management if the expected value of the instrument created was nil. This undermines traditional growth shares which often had a nil market value but doesn’t provide a coherent and acceptable to HMRC basis for valuing such shares which one can with reasonable confidence assume should be resilient to a look back HMRC review. The diversity of growth shares also means it is impossible to standardise a valuation methodology.

This does not prevent growth share awards being made but it is setting up a dynamic where there is a tendency to play safe and assume a higher value and cost of participation than might be necessary because of the uncertainty and the costs of preparing growth share valuations that might be resilient to HMRC look back reviews start to become disproportionate.

JSOPs in contrast providing they do not stray from the basic model have a valuation methodology that was codeveloped with HMRC about 20 years ago at the inception of the JSOP to lean on and so a JSOP valuation should be more resilient to a potential look back review.