There were no new direct changes to the employee share scheme legislation in the Spring Budget of 2017 but there were some changes and announcements that may have some significant longer-term impacts on employee share schemes.
1. Enterprise Management Incentives (“EMI”)
Most welcome was the government’s announcement that it would, in 2018, seek approval for the continuation of the exemption from EU State Aid rules for EMI options to allow this tax relief to continue beyond 2018. Some had speculated that the government might take the expiration of the exemption in 2018 as an opportunity to withdraw EMI relief, so it is an encouraging sign that the government recognises that allowing a capital gains tax treatment on business growth through EMI options is important to sustain a vibrant private sector after Brexit. However, an extension of the exemption in 2018 requires EU co-operation and so concerns remain that achieving this exemption for EMI may be complicated by the Brexit negotiations which will be underway at this time.
2. Employment Status
The increase in National Insurance contributions for the self-employed was announced in the context that it was unfair that the same income should suffer different levels of taxation depending upon whether a person was employed or self-employed. This is a complex area of taxation with potentially profound long term policy implications but to the extent it removes some of the tax advantages of self-employment, compared with employed status, it may encourage more businesses to consider the opportunities that employed status provides for them to offer tax-advantaged equity participation to employees.
3. Dividend Allowance
By contrast, the reduction of the annual tax free dividend allowance from £5,000 to £2,000 reduces the attractiveness of holding shares in one’s employer. However, for most participants in employee share schemes, it is the opportunity for capital growth rather than dividend income which is the main attraction. The change may encourage companies with Share Incentive Plans (“SIP”) to look again at using tax efficient SIP dividend shares rather than paying cash dividends.
4. New Close Company Gateway postponed until 2018
Potential collateral damage arising from the initial proposals has been identified and so implementation has been postponed to allow for further consultation.
5. Abolition of Tax Reliefs for Employee Shareholder Status (“ESS”)
The withdrawal of the ESS tax reliefs announced and implemented last year was confirmed.
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 call William Franklin on 0121 348 7878 or email William at firstname.lastname@example.org.