Office of Tax Simplification publishes its interim report on unapproved share schemes
On 2 August 2012 the Office of Tax Simplification (OTS) published an interim report on its review of unapproved share schemes. The report summarises the areas of difficulty identified during its programme of meetings with a number of interested parties, representing both listed and owner-managed companies. We will concentrate on the issues that were identified as relevant to OMBs.
The key areas identified were:
- Difficulties with the valuation of private company shares
- Tax issues for Employee Benefit Trusts (including inheritance tax issues and charges on loans to participators in a close company)
- Part 7, ITEPA 2003 (employment related securities legislation, in particular restricted securities).
Employee share schemes are perceived to be a highly complex area of tax legislation by companies and their advisers, but are seen as a key part of a company’s strategy for the following reasons:
- Retention and recruitment of key staff;
- Alignment of employees' interests with shareholders' interests; and
- To drive performance targets (whether corporate or individual).
Particular areas of complexity for which specialist advice is crucial to the effective operation of share schemes, particularly where they are not one of the approved schemes (most commonly EMI), were seen as:
- PAYE penalties and deadlines;
- Difficulties with the valuation of private company shares;
- Part 7A ("disguised remuneration" rules);
- Form 42;
- Tax issues for employee benefit trusts (including inheritance tax issues and charges on loans to participators in a close company);
- The difficulty of obtaining clear and up to date guidance from HMRC on what is a very difficult and uncertain area of tax law;
- Managing internationally mobile employees; and
- Part 7 (employment related securities legislation).
The report looks in detail at each of these issues, but the overall conclusion is that companies are implementing plans for genuine commercial reasons, rather than tax avoidance motives. However, because share schemes have been an area where tax avoidance has been prevalent, anti-avoidance legislation is significant, meaning that there are many traps to be negotiated. A common view among participants was that there has been an assumption that unapproved share plans, particularly where EBTs are involved, have only been set up for tax avoidance purposes.
The OTS does not provide any solutions to the many concerns raised by participants in this interim report, but recognises the importance of share schemes in many companies’ strategies for growth, whatever the size of the business.
Companies will often use one of the approved share schemes, principally EMI, whenever the requirements can be met. However there are a number of reasons why EMI cannot be used, and it is here than companies will fall back on unapproved schemes, even though the tax treatment for the employee is not as attractive.
At Gabelle, we have the expertise to look at a company’s requirements when looking at rewarding employees with participation in the company’s growth, and to propose and help implement an appropriate structure.