The tax advantages that are linked to ESS-provided shares will be abolished for arrangements entered into on, or after, 1 December 2016, with the status itself being closed to new arrangements at the next legislative opportunity.
The change was announced by Chancellor Philip Hammond today (Wednesday 23 November 2016) in his Autumn Statement speech.
The change reflects evidence that suggests the employee shareholder status, also known as shares for rights, was primarily being used as a tax planning vehicle for high-earners, rather than as a way of supporting a more flexible workforce.
The ESS was introduced in September 2013 and enables an employee to give up certain employment rights in exchange for shares worth at least £2,000 from their employer or employer’s parent organisation.
Under the current arrangement, no tax or national insurance contributions are paid on the first £2,000 of the shares awarded, and no capital gains tax is paid on the first £100,000 of gain in value as long as the shares were worth no more than £50,000 at the time the award was made.
Colin Kendon, partner at law firm Bird and Bird, said: “The abolition will leave many [organisations] that do not satisfy the enterprise management incentive (EMI) plan conditions with no government-backed qualifying share plan.
“Many of these [organisations] used shares for rights to reward management for genuine commercial growth; [organisations] in this position are likely to use ‘growth share’ arrangements in the future as the next best alternative.”
Mark Quinn, head UK talent business at Mercer, added: “It is regrettable that the Chancellor will be removing the tax advantages of ESS. ESS is well regarded and, particularly in young [organisations], viewed as a mechanism for increasing employee engagement by making them shareholders while improving the flexibility of the employment proposition.
“Removing the tax advantage will undoubtedly reduce the take-up of such schemes. This runs counter to the government’s stated intention to improve employee representation or engagement as a means of improving corporate governance and with evidence of employee-owned businesses performing more strongly.”
Phil Hall, head of public affairs and policy at the Association of Accounting Technicians, said: “The decision to scrap the tax advantages of the employee owner status is long overdue. There are a wide range of successful employee share schemes that do not require the sacrifice of employee rights and these have always been a more appropriate choice. Having highlighted the potential for abuse before they were introduced and continued to do so ever since, it is obviously pleasing that the government have finally listened and taken action.”