Partner Article

A look at employee ownership

In principle, I support wider access to employee share ownership schemes, writes Tim Stovold, tax partner at top 20 chartered accountancy firm Kingston Smith LLP. The direct methods of achieving this have improved greatly over recent years, with Enterprise Management Incentive Share Options being the approach most owner-managed businesses will use for their key executives.

However, the focus of this consultation is on indirect employee ownership. The method envisaged is that the owners of the company will transfer at least 50% of the share capital to an Employee Benefit Trust (EBT) which will hold those shares on behalf of ALL employees, but this may exclude the directors or founders of the business. This disposal will be exempt from Capital Gains Tax for the owners disposing of the shares, even if they later receive payment from the EBT; although, any such payment will very like have been taxed as a dividend in the hands of the EBT trustees first, so the tax exemption is not nearly as good as it sounds for the owners who now own less than half of what they held before.

Once the company is held in this way, each employee will be allocated an annual amount that they are able to receive tax-free each year. The total annual cost to the Treasury is limited to £50m so, assuming that most workers who will benefit from this scheme will be basic rate taxpayers, the total bonus payments that can be paid each year will be in the region of £109m. The consultation document stresses that no annual amount has been set, but the examples given use £500 and £750, so we are not expecting the amounts to be much higher than this. If the annual amount is set at £750, this would allow 146,000 employees to participate in this scheme.

It has been picked up that this indirect ownership model has similarities to the John Lewis approach of rewarding its employees. According to figures published on its website, John Lewis employs 84,700 people, so this could be more than half the capacity available for this scheme. The only way to increase the number of employees that could benefit would be to reduce the annual maximum payment; but if this became, say £200, there is real doubt over whether the benefit of being able to pay £200 per year tax-free justifies transferring 50% of the company into indirect employee ownership.

I fear that this is a scheme that is very unlikely to have the desired effect – very few owners of businesses will be happy to transfer half of its value to the employees for such a low level of employee benefit. There are features of the Profit Related Pay scheme that was abolished from 1 January 2000 that would be better adopted here, but that scheme was simple and therefore too popular - so ultimately too expensive - for the Treasury to continue.

This was posted in Bdaily's Members' News section by Kingston Smith LLP .