Over the past year, it is not what has changed about all-employee share schemes, such as sharesave (save-as-you-earn) schemes and share incentive plans (Sips), that is vexing those operating in this marketplace, but rather what has not.
Mike Landon, a principal at consultancy Mercer, explains: “For quite a few years, we have been hoping that the government is going to do something to help these schemes, but it has not.”
Many in the industry have had their fingers crossed hoping the government would make changes to these schemes by raising the limits on employee contributions or reducing the number of years it takes for employees to benefit from the full tax relief available on a Sip.
Phil Hall, head of public affairs at ifs ProShare, a not-for profit organisation that promotes employee share ownership, says: “The monthly [sharesave] contribution limit has been set at £250 for more than 15 years, so it may well be time to review this, especially in light of the rising number of employees saving the maximum amount each month.”
While failing to make the desired changes to employee share plans, the government has, however, introduced several other initiatives. These include the introduction of a flat rate of capital gains tax (CGT), currently set at 18percent.
Rashree Chhatrisha, a senior consultant at employee share plan consultancy MM&K, says: “There has been a lot of debate about how this will affect employee shareholders, because before, the longer you held shares, the less CGT you would pay. Now we will all pay this 18percent flat rate, so the debate is about whether employees will be encouraged to hold onto their shares.”
Whether employees decide to stick with these schemes will largely depend on employers providing both financial education and good communication for staff.
A further development was also set to challenge the market as a result of the government’s plans to tinker with the tax treatment of non-domiciled staff working in the UK. Companies operating Sips and sharesave schemes were to be required to offer these to all UK-resident employees even if they had no intention of living in the country long-term. However, the government has now decided firms will not be obliged to invite non-ordinarily resident UK employees to take the part in these schemes.
The changing economic environment is also expected to soon start taking its toll on some providers in the all-employee share scheme market. Phil Ainsley, head of employee share plans at provider Equiniti, says: “As the economic climate pinches, there’s going to be one or two casualties. The cost of managing plans and incorporating all the legislation from the UK, but also from the EU, into a business is huge, so I can see one or two of the players in the market not surviving.”
The economic climate could also have an impact on how employees perceive the schemes they are offered. Tim Butter, a director at accountancy firm Baker Tilly, says: “Share prices aren’t going up these days. There may well be a lot of people sitting around thinking ‘my shares aren’t going up in value and may even be going down’.”
This could mean that employers may be more reluctant to launch sharesave schemes. For employers that do so the trick is to communicate the fact that both Sips and sharesave schemes are designed to be long-term investments. The latest ifs ProShare annual Employee share ownership survey, published in May, found that while there were 10 fewer sharesave schemes operating last year than in 2006, the number of employees participating in these schemes had risen by 600,000.
In the past, employers have favoured sharesave, primarily due to its relatively risk-free nature for employees. It has also generally been considered to be less expensive by employers. However, Landon now sees a longer-term trend emerging of growing interest in Sips. “At the moment, I would say that the balance is still more in favour of [sharesave] options, but there has been a gradual trend over the past two or three years for more companies to introduce a Sip,” he explains.
One of the catalysts behind this was the change to the accounting treatment of these schemes brought in from 2005, which saw an accounting charge introduced, eroding some of the bias in favour of sharesave options. Judith Greaves, head of tax at law firm Pinsent Masons, adds that further revisions were made to the accounting standards earlier this year, which are due to take effect in January 2009. These changes mean that when employees decide to stop paying into an existing sharesave contract in favour of a new one, employers are required to bring forward the relevant accounting charges for this first contract, while having to charge the new option to the profit-and-loss account as well. “That has created an element of double counting, which gets some people very cross,” she says.
When setting up an all-employee share scheme, Greaves says it is important for employers to first seek advice to ensure they implement the right scheme for their organisation and are able to do so in the most efficient manner.
While some of the desired changes to all-employee share plans have not materialised, such schemes are still evolving. Chhatrisha says that in terms of product development, companies are looking for smarter administration systems, particularly if they have staff based overseas. This is something scheme administrators are looking into, she says.
Landon, meanwhile, believes the facility to make free share awards within a Sip is underutilised and predicts that this too will see an upswing in popularity.
He is also refusing to give up hope that some of the long-awaited government-directed changes to all-employee share schemes could come to fruition in next year’s budget, which is likely to be more than welcome in the current economic environment EB For more buyer’s guides visit:focus on factsWhat are all-employee share schemes? All employee share ownership plans are savings schemes in which all employees are able to buy shares, often at a discount, in the company they work for. The most common schemes approved by HM Revenue and Customs are sharesave (also known as save-as-you-earn schemes) and share incentive plans (Sips). Other schemes include the company share option plan (Csop) and the enterprise management incentive (EMI) plan.
What are the origins of all-employee share schemes? The roots of these schemes can be traced back to the late 1880s, when a pamphlet entitled On profit-sharing between labour and capital: a word to working men was published, which referred to a share ownership model. It was with the introduction of sharesave plans in 1980 that employee share ownership really gained traction in the UK. These were followed by the introduction of Sips in the Finance Act 2000.
Where can employers get more information and advice on all-employee share schemes? HM Revenue and Customs’ website www.hmrc.gov.uk/shareschemes contains detailed information about these schemes. Ifs ProShare, a not-for-profit industry body, can also help at www.ifsproshare.org or on 020 7444 7141, while Business Link offers useful information at www.businesslink.gov.uk or on 0845 600 9006.
in practiceWhat is the annual spending on all-employee share schemes? Around five million UK staff are in some form of employee share plan, with the vast majority in sharesave schemes or Sips. Ifs ProShare figures show that last year, the average individual amount invested per month in a sharesave scheme was £89, while the average for a Sip was £83.
Which share scheme providers have the biggest market share? Some of the biggest players in this market include Equiniti, HBOS Employee Equity Solutions, Yorkshire Building Society, Capita Share Plan Services and Computershare.
Which share scheme providers increased their share the most over the past year? While exact figures are unknown, market share has held relatively steady, although there are now predictions of consolidation in the longer term.
Nuts and boltsWhat are the costs involved? Providers’ charging structures vary according to the type and size of the plan and whether the administrator also manages the savings pot. A typical sharesave scheme costs the equivalent of less than 2percent of an employee’s salary.
What are the legal implications? Employers need to establish rules on which employees will be eligible and outline good-leaver and bad-leaver provisions. They must stipulate that such schemes’ provision is not automatic and is independent of staff employment contracts. If an employer wishes to use newly-issued shares for the scheme, it must have the necessary authorisation to allot these.
What are the tax issues? All-employee share schemes that are approved by HM Revenue and Customs can offer tax relief for employees and employers.
With sharesave schemes, employers have to gain approval to qualify to offer staff a 20percent discount on the market share price. If the scheme complies, staff are not eligible for either tax or national insurance contributions (NICs) on the gains they make from the share options, while employers will not have to pay corporation tax deductions in relation to the scheme.
For share incentive plans, employees can buy partnership shares from gross salary, so benefiting from tax and NI? efficiencies. Free or matching shares awarded by the company are also free from income tax and capital gains tax if held in trust for five years. Shares can be traded after three years but may not attract full tax relief.