Labour’s ‘inclusive ownership funds’: is there a more sensible structure?

The Labour Party has proposed that all companies with more than 250 employees should, over a 10-year period, put up to 10% of their share capital into an employees’ trust. Of the dividends paid on such shares, employees would benefit from tax-free distributions of up to £500 per year, with the balance going to the government by way of a hidden form of advance corporation tax. This idea has met with derision from many companies and advisers – and rightly so.

Yet hidden within that proposal lies the seed of a perfectly good idea which might be of real attraction to many companies of whatever size.

A more balanced proposal?

I refer to the concept – first put forward  in the context of ‘employee-ownership trusts’ (see earlier posts) – that dividends on collectively-held shares in a company could be paid out to qualifying employees, on an ‘all-employee/similar terms’ basis, and that, provided such dividend income of the trust was so distributed to employees within a period of, say, 3 months of receipt:

  • it would be exempted from tax in the hands of the trustees; and
  • fall to be taxed as dividend, not earned, income in the hands of the employees.

Such an arrangement would be voluntary and, to an extent, ‘self-policing’ in the sense that, if there were no profits, there could be no dividends. Likewise, to the extent that all shareholders are paid dividends, so too would the employees – without individual employees needing to buy, or pay tax on the acquisition of, an actual holding of shares. The £2,000 dividend tax exemption would mean that most employees would not pay tax, and if, exceptionally, the individual distributions exceed that sum, it is surely fair and reasonable that tax (but not NICs) is paid on the amount of the excess at the employee’s marginal rate.

The shares in question would need to be of the same class as that held by the majority or controlling shareholders or, at least, have rights to receive payment of any dividends which are no less favourable than those attaching to any other class of share in issue.

To qualify for such favourable tax treatment there might be a threshold percentage level of shareholding which must be so held collectively – but this could equally be left to the determination of existing shareholders. Such a collective holding – through a trust – would also afford the opportunity for the votes attaching to such holding of shares to be cast by the trustees in a manner which they determine to be “in the best interests of employees”, and for the company to establish a corporate governance structure for the selection and appointment of trustees. That said, perhaps the principal objective of the collective ownership of shares would be best served by allowing any voting rights on such shares to be restricted or suspended.

Provision would be needed to address the question of how the proceeds of sale of the collective holding should be applied if the company were sold. This is a conundrum facing The John Lewis Partnership and other such ‘employee-owned companies’ (being not in fact ‘owned’ by individual employees): who ultimately derives benefit from the growth in capital value of such shares? It would surely be unfair for only those in employment at that time to derive such growth. If the idea is merely to encourage dividend distributions to employees, the shares so held could perhaps be redeemable at par, or for a nominal sum, in the event of a sale of the company, so that capital value is retained by other shareholders.

This is merely the seed of an idea. It will be interesting to see if the Conservative government might germinate it into a fully-developed structure for enabling employees (as opposed to the government) to share in annual profit and thereby afford incentive to work for the success of all shareholders.

30 September 2018

Trustees of employees’ trusts: are you doing enough in response to the upcoming “outstanding loan charge” to income tax and NICs?

Given the forthcoming “outstanding loan charge” to income tax under the Disguised Remuneration rules, trustees of all forms of employee trusts should, by now, have taken steps to identify any and all loans, quasi-loans, and other forms of credit extended to employees, or to any person nominated by an employee (past or present) or any person linked with an employee (“a relevant person”) outstanding made at any time after 5 April 1999 and outstanding at any time on or after 17 March 2016.

The one-off, and penal, charge to income tax and NICs on “outstanding loans” will have effect on 5 April 2019 (or possibly later in the case of certain fixed-term loans). The scope of the charge is broader than many have assumed. In some cases, for example, it could apply notwithstanding that the indebtedness has been repaid, or the loan written-off, before 5 April 2019 but since 17 March 2016.

Penalties for failure to provide information to HMRC

If a loan or quasi-loan has been made to a relevant person on or after 6 April 1999 and any amount is, or is deemed to be, outstanding at any time between 17 March 2016 and 5 April 2019, the employee and the lender or creditor are each obliged to provide to the employer, within 10 days after the loan charge date, all the information necessary for the employer to comply with its PAYE obligations. If, having taken reasonable steps, the employee and lender have failed to contact the employer to provide the information, each is responsible for notifying HMRC of that fact in the form specified by HMRC (para 36, Sched 11). There are penalties for a failure on the part of trustees to comply with this obligation.

Avoiding the ‘outstanding loan charge’ by settlement

Of course, the outstanding loan charge will not arise if settlement of all previous tax liabilities (including inheritance tax charges, if applicable) have been agreed with HMRC, and the tax has been paid in full pursuant to HMRC’s settlement arrangements ( as to which, see ), but it is apparent that not all employers who made use of ‘disguised remuneration’ arrangements, or the employees concerned, have yet registered their interest in settlement with HMRC. There is a deadline, of 30th September 2018, for providing all information to HMRC if settlement is to be reached before the penal charge arises on 5 April 2019.

HMRC are willing to agree 5-year payment terms for those employees with expected annual taxable income of less than £50,000, and flexible payment arrangements for those who are in genuine financial difficulty.

As part of the settlement, consideration needs to be given to how an outstanding loan is to be released or written-off and the employee put in the economic position he expects to be in once all taxes have been paid on what he or she will then regard as ‘their money’. Trustees need to consider both their obligations as trustees needing to comply with the terms of the trust deed (etc.), and the interests of the beneficiaries in winding-up the arrangements in a cost-effective manner.

There will also need to be a focus upon the terms of the trust deed (etc.) insofar as they might provide for the cost of NICs to be borne out of the trust fund, as this can reduce the costs of a settlement.

Exemptions from the ‘outstanding loan charge’

There are limited exclusions from the outstanding loan charge although none of these applies if there is a connection with tax avoidance. They relate to:

(a) certain loans made on ordinary commercial terms if similar loans were made available to members of the public at large;

(b) if an employer has made an employment-related loan below the £10,000 threshold (in s 180 ITEPA), the employee’s employment has been transferred and the employer would otherwise be treated as having made a quasi-loan by acquiring a right to repayment of the outstanding loan;

(c) subject to conditions, loans by a bank (or similar) to its employees as part of a package of benefit generally available to its employees;

(d) subject to conditions, a loan by an authorised lender made to an employee under an employee car purchase scheme;

(e) certain loans made before 9 December 2010 to enable the acquisition, within a year, of unlisted shares in the employer company or another company in the same 75% group, although an outstanding loan charge may still arise if the loan remains outstanding 12 months after the shares cease to be held by the employee.


EMI share options – a new transparency obligation

Regulations* come into effect today, 11th July 2018, which give effect to a government commitment to add the tax reliefs and exemptions for which EMI share options qualify to the list of tax advantages in relation to which HMRC is authorised, by s 180(2) Finance Act 2016, to collect and publish information about EU State Aid received by beneficiaries in accordance with existing EU obligations. The commitment was made by HM Treasury as part of the process for securing a renewal of EU state aid approval on 15th May 2018 – at least until Brexit (see earlier post).

The EU’s commitment to publish information on companies which receive State Aid relates only to State Aid in excess of €500,000

The commitment is to publish information on companies that receive aid in excess of €500,000 and details of this, and of the information expected to be provided is to be found here:

The information to be published by the EU includes, for example, the name of the business, its region and trade sector.

Neither s180 FA 2016 or the Regulations refer to a threshold limit of any amount, but it is understood that HMRC would not seek to exercise its powers to require disclosure of information on state aid insofar as there is no corresponding obligation to the EU to do so.  The amount of the state aid associated with EMI options would appear to be, broadly, the difference, as at the time of grant, between the value of an EMI option, and the value of an ‘unapproved’ option which would be expected to deliver a similar quantum of benefit net of tax. This is clearly less than the amount of the cost to HM Treasury of the tax saving to the individual, which is not itself a form of proscribed state aid. It is understood that HMRC is developing modelling tools for quantifying the amount of state aid associated with the grant of EMI share options. At present, it would appear that only a small number of companies would be beneficiaries of state aid in excess of the EU’s €500,000 threshold. For the vast majority of companies whose employees are granted EMI options this additional obligation to disclose information about the company should therefore be of no concern.

At the time of posting, we are awaiting an HMRC Bulletin giving further information as to how HMRC intends to give practical effect to the government’s transparency obligation.


*The Enterprise Management Incentives Exemptions and Reliefs (Amendment of Tax Advantages in Schedule 24 to the Finance Act 2016) Regulations, SI 2018/737

EMI share options – EU re-grants State Aid approval

On Tuesday 15th May, it was announced by the EU that a renewal of State Aid approval of EMI share options had been granted for a period of 5 years or until, if earlier, the time when the UK leaves the EU.

It is understood that the renewal is, in effect, backdated to 6th April 2018, when the earlier approval lapsed (see preceding post).

It remains unclear what will happen when the UK leaves the EU. The UK’s State Aid obligations will continue, and so it is for negotiation between the UK and EU as to what then happens in relation to EMI share options.

For the time being, at least, it is back to ‘business as usual’ in relation to EMI options.

EMI share options – A (EU) ‘fly in the ointment’

At lunchtime on 4th April 2018, HMRC made the announcement reproduced below as “Employment Related Securities Bulletin No.27”.

It is apparent from this that it would be sensible for companies and/or their shareholders to defer the grant of any EMI options scheduled to be granted after 6th April 2018 until the government has secured fresh EU State Aid approval from Brussels. As yet, we know not when – or even if – this will be, although we do know that HM Treasury is confident that it will be forthcoming, and that this will be sooner rather than later.

If there is some compelling commercial reason why a company needs to grant employee share options after 6th April 2018, and before fresh EU State Aid approval has been given, and such options would otherwise be expected to qualify as EMI share options, careful consideration needs to be given to the terms on which such options are granted so that, if necessary, it will be open to the parties to cancel and re-grant such options at a time when the new options will qualify for the tax reliefs associated with EMI share options.

If the government were to allow the tax reliefs for options purportedly granted as EMI options after 6th April and before fresh approval is given, the government would be obliged, under EU treaty obligations, to recoup from employer companies the element of state aid accorded by such reliefs. In effect, such options will fall to be treated as non-tax advantaged share options.

The final reference to “before 6th April” is an error on the part of HMRC and should read “before 7th April”.

If you would like to discuss this matter further, please contact me by email.


Companies and advisers concerned with the grant of EMI share options

EU State Aid approval for the EMI scheme, expires on 6 April 2018. The government has, since last year, been following the process of applying to the European Commission for fresh approval and we await the Commission’s final response. We won’t receive this before 6 April 2018 and so those involved in the establishment of EMI schemes and grant of EMI share options need to be aware that there will be a period between the lapse of the existing approval on 6 April and a decision by the EU Commission on a fresh approval. The government is working hard to ensure this period is as short as possible.

HMRC considers that the State Aid approval applies to the granting of share options and therefore that share options granted up to and including 6 April 2018 won’t be affected by this lapse of the approval.

EMI share options granted in the period from 7 April 2018 until EU State Aid approval is received may not be eligible for the tax advantages presently afforded to option holders, and accordingly share options granted in that period as EMI share options may necessarily fall to be treated as non-tax advantaged employment-related securities options.

Companies may wish to consider delaying the grant of employee share options intended to qualify as EMI share options until fresh EU State Aid approval has been given.

HMRC will continue to apply its current guidance and practice, in relation to employment-related securities options validly granted as EMI share options before 6 April.

A further update will be provided in due course.

[End of announcement]


Share Incentives in Companies under the Control of Private Equity: Some Blue-Sky Thinking?

Employees of companies under the control of another body corporate – in particular, those controlled by ‘private equity’ funds –  are excluded from participating in EMI share option and other tax-favoured employee share plans (SIPs, SAYE schemes and CSOPs). Given the substantial increase in the number of such employees in the UK now that so many British companies have fallen into the partial or entire ownership of such funds, it is suggested that the Government examine how such companies may allow their employees to share in the growth in value to which they contribute through share ownership in a manner which does not put them at a fiscal disadvantage compared with non-employee investors.

It is understood that, if the Government were to afford such a mechanism enabling such employees to participate in a type of share plan which is both relatively straightforward to establish and (crucially) has certainty as to the tax treatment for both employer and employees, members of the BVCA (for example) would be keen to direct or encourage investee companies to establish such plans, given that providing effective incentives to employees is just as much in the interests of the private equity fund as it is in the financial interests of the employees.

The idea of employees benefitting from being joint owners of shares in a company, under a ‘joint share ownership plan’ (or JSOP), was first developed in 2001 and has since been widely adopted by independent companies for allowing selected senior employees to benefit in excess of the limits under tax-favoured plans. The tax treatment of JSOPs has long been settled and accepted by HMRC. A JSOP has the benefit of allowing participants to benefit from growth in value of a share without the need for them to first acquire, and later sell, ownership of the whole of the share. However, at present a company has no certainty as to what is the taxable value of an interest acquired by an employee as joint owner, and the financial risks of discovering some time later that HMRC disagrees with the original estimate of the taxable value of an interest as joint owner of shares is perceived by private equity funds as commercially unacceptable.  Leaving all consideration of tax aside, and all other things being equal, the JSOP is, or would be, the mechanism most favoured by private equity funds (when compared with non-tax-favoured share options, ‘growth shares’ or ‘phantom’ share schemes’).

Accordingly, it is suggested that HM Treasury consider consulting upon (with a view to including in the Finance Act 2019) provisions which will allow and encourage wider use of JSOPs in private equity-owned companies, but with strict rules on valuation and subject to a minimum proportion of the issued share capital of the company being made available to all employees through the plan over a given (10-year?) period.

Outline of the proposed ‘employees’ share scheme’

The idea is that, if a company commits to putting a prescribed minimum proportion of its issued ordinary share capital into joint ownership with all its employees (on an individual and ‘same-terms’ basis, subject only to a qualifying period of employment for eligibility), on terms whereby each participant will, for (at least) so long as he or she remains with the company (or group), benefit from all future growth in the ‘pro rata’ value of the jointly-owned shares (i.e. the growth to which they contribute as employees):

(a)  the taxable value of such ‘interests in employment-related securities’ acquired by each employee would be treated as their intrinsic value (nil); and

(b)  the company could then likewise permit selected employees to acquire such interests in additional numbers of shares of the same class (within a limit) on the basis of the same taxable value (nil).

It is suggested that such limit, on the number of additional shares in which interests as joint owner may be acquired on a selective basis, be a maximum of [8] times the number of shares in which every qualifying employee will acquire an interest as joint owner on that occasion.

To qualify for such favourable treatment:

(i) the shares used must be ordinary shares of the class which is both:

– that which is otherwise owned by the controlling shareholders; and

– the largest class (in terms of nominal value) in issue;

(ii) the ‘pro rata’ value of shares of that class would be determined by taking the ‘market value’ of the whole of the issued share capital of that class (as agreed with HMRC SAV), and dividing it by the number of shares in issue;

(iii) the threshold level, above which participants will be entitled to any increase in value, may be set at or above that pro rata value at the date of acquisition by employees of their interests as joint owners.

The co-owner of the shares would (typically) be the controlling company, but may instead be a trust established for the purpose.

Such an arrangement would:

  • allow all eligible employees to participate in the growth in capital value to which they contribute as employees;
  • require only minimal changes to current tax rules (with which it is entirely consistent) so as to provide that, if all conditions are satisfied, the initial taxable value of such an interest is deemed to be nil;
  • allow employees to participate as actual (joint) shareholders (as opposed to being mere optionholders), and therefore participate in (a pro rata share of) any dividends, and, if the joint ownership agreement so provides, the exercise of voting rights;

[An enhancement might be that, if the whole amount of any dividends on jointly-owned shares are paid to the employee joint owners, all such income would be treated as dividend income of the employee, not as ‘earnings’.]

–     (provided the initial market values of the shares is properly identified and agreed at the outset with HMRC SAV) present little or no scope for abuse or ‘tax avoidance’.

Aside from tax, the concept of such ‘joint ownership’ avoids the situation (as under a ‘qualifying Schedule 2 Share Incentive Plan’) in which the company first ‘gives away’ the current accrued value of the shares, only to have to repurchase, or fund the repurchase (through a trust) of that same value when an employee leaves or wishes to sell. Under a JSOP, the employee only ever acquires an entitlement to future growth in value.

If, on the conditional basis proposed, the initial taxable value of the interests is accepted as nil, the only issue to be settled with HMRC SAV is, in the case of unquoted companies, the initial market value of the whole of the shares of that class in issue immediately after any new issue for the purposes of an award under the plan.

If agreed that the IMV of the jointly-owned shares is to be taken to be their pro rata value (i.e. market value determined on a pro rata basis with no discounts for minority interest, lack of marketability etc.), the legislation might also provide that:

–      if a participating employee (or ex-employee) realises the value of his interest for a consideration calculated on the basis that the market value of the jointly owned shares is likewise determined on a ‘pro rata’ basis, there would be no charge to income tax on such disposal under Chapter 3D, Part 7, ITEPA (disposal of employment-related securities for more than market value); and

–       if the shares are bought back by the issuing company, such a ‘purchase of own shares’ would be treated as a capital transaction and not give rise to a distribution income tax charge (as it would if the interest had been held for less than 5 years).

Practical experience of such ‘joint ownership plans’ since 2001 has been very positive, albeit with the difficulties of determining the initial taxable values of the interests (as joint owners) acquired by employees – exacerbated by the withdrawal by HMRC SAV earlier this year of any facility to agree such values for PAYE and self-assessment purposes.

Encouraging companies to establish such plans by removing that obstacle (identifying the taxable initial value of the employee’s interest) by requiring participation to be extended on an ‘all-employee’ basis would, we believe, prove to be of real attraction to a range of unquoted companies which extends beyond those which presently offer, or could offer, employee share participation.

Crucially, it is estimated that the cost to HM Treasury of facilitating such plans would be de minimis.

Disguised remuneration: EBTs and the new “outstanding loan” charge applying in April 2019 – what if the individual dies in the meantime?

The standard of legislative drafting in the UK is very high and particularly so in the case of tax legislation. It was therefore a surprise (and, I am afraid to admit, a matter of some satisfaction) to have discovered an error in the highly complex ‘disguised remuneration’ rules first enacted in 2010, and since amended on many occasions, most recently in the F(No.2)A 2017 to take account of the forthcoming “outstanding loans” charge in April 2019, and which the Parliamentary draftsman has accepted will need to be corrected in a future Finance Act.

The subsection in question is s554A(4) ITEPA 2003. As most recently amended, this is intended to provide that the 2019 “outstanding loan” charge will not apply if the individual who has received the loan from an EBT (or other relevant third party) has then died. It appears that the draftsman (perhaps understandably) overlooked the fact that the sub-section had already been amended by the first Finance Act of 2017. As a result, the words: “…or a relevant step within para 1 of Sched 11 to F(No.2)A 2017 which is treated as being taken…”[i.e. the 2019 outstanding loan charge] have ended up in the wrong place. As it stands, s554A(4) can be of no effect, as neither of the conditions in sub-paras (a) or (b) [i.e. that the relevant step is within s554B or 554C] will ever be satisfied in the case of such an ‘outstanding loan charge’.

To give effect to the presumed intention, s554(4) should read :

Chapter 4 does not apply by reason of a relevant step taken on or after A’s death if:

(a)  the relevant step is within s554B, or

(b)  the relevant step is within s554C by virtue of subsection (1)(ab) of that section, or

(c)   it is a relevant step within para 1 of Sched 11 to F(No.2) A 2017.”

The new HMRC Trust Registration Service: an HMRC clarification

This post follows on from that describing the new HMRC Trust Registration Service (“TRS”) below posted in 2017.

HMRC have confirmed, in an email exchange with me, that, in effect, a liability to stamp duty is a liability to a ‘relevant UK tax’ and therefore a trust which has only incurred a liability to UK stamp duty, and no other UK relevant tax, is still obliged to be registered. This may affect trusts holding unquoted shares.

HMRC have stated that their position is “that a trustee of a relevant trust that incurs stamp duty in relation to trust assets in a given tax year [is] required to register that trust on the TRS because the payment of stamp duty will cancel a SDRT charge that may otherwise arise. The TRS Regulations exclude a reference to stamp duty because an agreement for the purchase of shares normally gives rise to an immediate liability to SDRT and the SDRT liability is in turn cancelled by the payment of stamp duty. [HMRC] will ensure that in the next iteration of [their] FAQ guidance [they] will make this position clear”.

It had been widely understood that both the omission of an express reference to stamp duty in the Regulations, and the passage in HMRC’s original guidance, to the effect that a trust would not be regarded as having a liability to a UK relevant tax if there was a particular exemption or relief applicable, meant that trusts which had only incurred a liability to stamp duty, not SDRT, would have no immediate obligation to register. It is now clear that this is not intended to be the case.

More on Autumn 2017 Budget announcements

Other ‘small print’ items of interest to those involved with DR/EBT settlements are:

  •  Extending offshore time limits – Assessment time limits for non-deliberate offshore  tax non-compliance will be extended so that HMRC can always assess at least 12 years of back taxes without needing to establish deliberate non-compliance, following a consultation in spring 2018; and
  • the government will also legislate in ‘Finance Bill 2017-18’ to put beyond doubt, with effect from 22 November 2017, that Part 7A of Income Tax (Earnings and Pensions) Act 2003 applies regardless of whether contributions to disguised remuneration avoidance schemes should previously have been taxed as employment income [per the Rangers’ decision] – this change will have effect on and after 22 November 2017.