New Vehicle for Employee Shares
This article was originally written for Company Secretary's Review, Volume 38 Number 12 (24 September 2014), published by LexisNexis.
The Government wants to seek views from businesses, employees and share scheme experts on some of the important issues raised by the proposal for an ‘employee shareholding vehicle’” (HM Revenue & Customs and HM Treasury consultation on the new employeeshareholding vehicle).
The Government continues to demonstrate its support for employee share ownership in all its forms with the publication on 17 July 2014 of an open consultation seeking views on the introduction of a new employee shareholding vehicle (“the consultation”). The consultation follows hot on the heels of the introduction of new tax reliefs for employee-ownership trusts (“EOTs”) to promote the trust model of employee ownership [see CSR Vol 37, p 73], the call for evidence seeking views on amending the rule against perpetuities for employee trusts and (generally) reducing the complexity of employee ownership [CSR Vol 37, p 153] and company law changes on share buybacks and treasury shares [CSR Vol 37, p 62].
The subject of the consultation is “Recommendation C” of the Office of Tax Simplification’s (“OTS”) final report following its review of unapproved employee share schemes. The OTS recommended the introduction of a “simple vehicle to enable companies… to manage their employee share arrangements and create a market for employees’ shares”. Through the consultation, the Government is keen to receive views on the introduction of such a vehicle, in particular in relation to various detailed tax issues.
The OTS and employee share schemes
The OTS was established to provide the Government with independent advice on areas of complexity in the UK tax system that could be simplified. In 2011 the OTS announced it would first review approved or “tax-advantaged” employee share schemes and then unapproved (“non-tax advantaged”) share schemes. The OTS’s final report on taxadvantaged share schemes was published in March 2012. It resulted in major changes to the relevant legislation, including self-certification by companies of adopted schemes and online filing of tax-advantaged share scheme forms [CSR Vol 37, p 198]. The final report on unapproved share schemes was published in January 2013. It included a far-reaching proposal to, in effect, overcome the costs and complexities of using an employee benefit trust (“EBT”) by introducing an alternative special purpose vehicle, with the working title of an “employee shareholding vehicle”.
Companies have typically used EBTs to facilitate transactions in shares by and on behalf of employees. The tax legislation in this area is complex and internal share market arrangements involving EBTs can be expensive to run. The rationale behind the creation of an employee shareholding vehicle is to allow shares (predominantly in unquoted companies) to be transferred to and from employees more easily and (it is intended) without the associated cost burden. As evident from the consultation the Government is generally supportive of the introduction of a new vehicle. However, it needs assurance that such a vehicle is needed and, if introduced, that the historic use of EBTs for “spotlighted” tax avoidance purposes is not replicated in the new vehicle. The consultation therefore seeks responses on two main areas: tax issues which the new vehicle could simplify and safeguards to prevent abuse.
The OTS identified a number of tax issues which could be simplified. A detailed description of these issues is outside the scope of this article; however, in summary:
- Inheritance tax: EBTs are generally exempt from the inheritance tax charges which apply to other trusts provided that certain conditions are met. In order to ensure that the relevant conditions are satisfied an EBT’s constitution needs to be drafted by a specialist adviser. The OTS recommends that the new vehicle be automatically entitled to equivalent inheritance tax exemptions.
- Double tax charge: for UK tax resident EBTs a gain on the disposal of shares is usually subject to capital gains tax. The same transaction may also generate an income tax charge on an employee. The associated relieving provision does not always operate to avoid a double tax charge. The OTS recommends that simpler access to the relieving provision is given through the new vehicle.
- Loans to participators: a tax charge of 25% (refundable upon repayment) arises on loans from close companies to their participators. The term “participator” includes an EBT once it becomes a shareholder of a close company. The OTS proposes that loans from close companies to the new vehicle should be exempt from the 25% tax charge.
- Transactions in securities rules: the OTS recommends that shares which are not sold for more than their market value should be excluded from these antiavoidance rules.
- Stamp duty: the OTS proposes that the transfer of shares to and from the new vehicle be exempt from stamp duty and stamp duty reserve tax. Such transfers to and from EBTs are currently subject to 0.5% stamp duty.
- Access to tax-advantaged schemes: such schemes cannot generally be put in place in subsidiary companies and so the Government asks if a company which is controlled by the new vehicle should be able to operate tax-advantaged share schemes if it is a subsidiary of such a vehicle.
- Disguised remuneration: the OTS recommends that the new vehicle be exempt from certain aspects of the disguised numeration rules which were introduced in 2011 to address tax avoidance involving third parties (especially EBTs).
Safeguards for the Exchequer
It is no surprise that a new employee shareholding vehicle will need safeguards to try to ensure that it is used only for its intended purposes. The following safeguards are proposed by the OTS:
- Residence: the vehicle (if EU rules permit) should be UK resident and, if a trust, all its trustees should be UK resident.
- Beneficiaries: these should be limited to employees and former employees. The consultation also considers whether individuals with significant influence over the relevant sponsoring company (or group) should be excluded from benefit.
- Restrictions on property held: the new vehicle may deal only with “qualifying securities” being fully paid non-redeemable ordinary shares in the sponsoring company or its holding company, except in the case of a corporate transaction in cash or resulting in a share for share exchange. It is proposed that the vehicle will not be able to hold any real property.
- Application of property: the property held within the new vehicle must only be applied for “qualifying purposes”, such as the acquisition and transfer of “qualifying securities”; payments or loans to a share incentive plan; payments of sums to certain beneficiaries; and granting options over “qualifying securities” to beneficiaries.
The breach of any of these safeguards would mean the various exemptions would cease to apply and the effect of this could be backdated.
Several other potential safeguards in addition to those proposed by the OTS are being considered by the Government. These include introducing minimum and maximum holding periods for shares held within the new vehicle; restrictions on the vehicle’s power to borrow money or set up sub-funds; and restrictions on waivers by trustees of the vehicle in respect of dividends and voting rights.
The OTS identified the need to facilitate sales more easily by employees of relatively modest quantities of shares acquired via a share plan. The OTS also acknowledged that this need should be considered together with the need that arises in some cases, as identified by the Nuttall Review of employee ownership in 2012, to hold a large static shareholding on behalf of employees. EOTs now provide a means to hold a controlling static shareholding.
An interesting question arising from the consultation is whether the new employee shareholding vehicle should be capable of having an existence independent from the control of a sponsoring company, e.g. as part of an employee ownership arrangement. Or whether it must, essentially, always be a shareholding warehouse and market making vehicle under the control of the sponsoring company.
The introduction of a new employee shareholding vehicle would be a farreaching change. A UK resident alternative to using an offshore EBT would certainly be welcome amongst supporters of employee share ownership in all its forms.
However, unless responses to the consultation show the need for this new entity the Government may decide not to proceed with it. All those who have, for example, had to deposit tax under the loan to participator rules, would prefer an in-house alternative to paying an offshore trustee of an EBT, or have otherwise encountered difficulties administering an employee share or share option scheme should read this informative consultation and respond to it. The deadline for responses is 10 October 2014.
Jennifer Martin, Senior Associate Graeme Nuttall OBE, Partner Fieldfisher
- The consultation paper on the new employee shareholder vehicle can be viewed at www.lexisurl.com/CSR461
- “Review of unapproved employee share schemes: Final report” prepared by the OTS is available at www.lexisurl.com/ CSR462.