UK: News Update, Winter 2000 - Taxation

Last Updated: 20 March 2000


In April 2000, a new share incentive plan will become available as part of the Government's proposed drive to encourage an enterprise culture. The draft legislation became available recently, providing a greater insight into the main features of the plan.

Whilst many companies will want to adopt the new scheme as part of the remuneration package offered to employees, a key issue is whether it will replace existing approved schemes such as the profit sharing scheme and the savings related share option scheme. The latest position is that the Government will make a decision after everyone has had an opportunity to comment on the draft legislation. In the meantime, companies with existing approved schemes must wait to see how this will impact on them.

Main features of the New Plan

The objective of the new scheme is to give the employer company flexibility in the way its shares are passed on to employees. Participation must be offered to all employees (including part-time) although a minimum period of service not exceeding 12 months can be imposed.

Under the scheme, the employer company will set up a UK resident trust (similar to the profit sharing scheme) which will buy shares using funds from the employer company or, in certain circumstances, from the employees. Contributions by the employer company will be deductible in computing corporation tax liability. The trustees can then allocate shares in one of three ways:

  • up to £3,000 worth of shares a year can be given free to employees (free shares)
  • employees can buy up to £1,500 worth of shares a year from their pre-tax salary (partnership shares)
  • up to two free shares can be given to employees for each partnership share bought (matching shares)

Dividends paid on the shares whilst they remain in the trust will be tax free if the employee uses them to buy further shares (dividend shares).

It is possible to impose performance criteria on the allocation of free shares. By contrast to existing approved schemes, the employer company may link the share award to individual, team, divisional or company wide performance. The criteria must be objective and must not operate to concentrate rewards on senior employees but, subject to this, companies will be able to set specific targets for separate groups of employees. For example, an employer company may be able to award shares to members of its sales force on the basis of individual sales targets, provided that everyone in the team has a similar chance of satisfying those targets. The practical effect is that the employer company will have the flexibility to target performance more effectively and appropriately to its business requirements.

Free, matching and dividend shares must generally remain in the trust for at least three years, whilst partnership shares can remain in the trust if the employee so chooses. After three years, employees may take their shares from the trust and will incur income tax and national insurance on no more than the initial value of those shares when originally allocated to them. If however, the shares are left in the trust for a total of five years, no income tax or national insurance will be payable at all.

When an employee leaves his job, any shares in the trust must be transferred to him. (It is however, possible to build in a right to forfeit free and matching shares where the employee leaves within three years of the award.) Where the employee receives his shares within five years of the award, income tax and national insurance will be payable unless the shares have been held for at least three years and certain good-leaver circumstances apply, such as redundancy or retirement. Where tax is payable, the amount will depend on how long the shares have been in the trust.

The Impact of the Scheme

The relatively low limits, and the 'All Employee' requirement mean that the scheme is of limited value to those companies wishing to use shares to reward key executives. However, the flexibility and tax advantages offered present an ideal opportunity for those companies who wish to spread share ownership throughout the workforce. Indications are that the new scheme will be extremely popular, particularly if the Government do decide to abolish the other approved schemes such as the profit sharing scheme and the savings related share option scheme.

What Happens Next?

The All Employee Share Plan comes into effect next year with the Finance Act 2000. The Inland Revenue have already indicated that they will be commenting on the draft documentation for new plans following the publication of the Finance Bill 2000. There will also be a fast track approval procedure for companies whose plans have been seen in draft. Given that indications are that the new scheme will be exceedingly popular, companies are advised to consider now whether an All Employee Share Plan is required and if so, what format it should take. In particular, companies will need to focus on the type and level of performance criteria which will be appropriate for awards of free shares. This could take some time and failure to act promptly could lead to delays should the Revenue be inundated with applications.

Walker Morris is currently preparing draft rules and examples of different performance criteria for use in connection with free shares.

Contact name: Simon Concannon

Walker Morris Client Newsletters can serve only to alert the reader to recent developments and to act as a preliminary, but no comprehensive guide. They should not therefore be relied upon in place of specific advice.

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