All Employee Share Scheme
Share Option Scheme for small companies
The All Employee Share Scheme is intended to be flexible, operated by small and large employees and reasonably cheap to set up and obtain Inland Revenue clearance. The scheme is intended to facilitate and encourage authorised employers to reward individual productivity and performance.
The All Employee Share Scheme is a planned tax incentive for small and large companies to remunerate all workers with share options and distributions of shares. Employed individuals are intended to benefit from the scheme. Contractors service companies would not appear to be able to benefit from the scheme.
Existing Share Option Schemes can attract PAYE
The general position regarding existing share option schemes, according to revenue guidance, is that provided there is no market or other arrangement or understanding for the sale of shares in the employer company, there will be no obligation to operate PAYE on the value of options. However, where the employer has taken meaningful steps towards floatation or has set up a facility enabling the employee to sell the shares, then the employer must operate a PAYE scheme. There is no obligation in certain circumstances to operate PAYE on the exercise of approved share options however Capital Gains Tax will apply on an eventual sale.
The New Employee Benefit Trust
With an All Employee Share Scheme and an Employee Benefit Trust "EBT" to create a potential market or exit route, shares can be passed tax-free three years from when the scheme is set up.
The scheme works by the company making contributions to the share scheme, which then purchases shares and appropriates them to employees. So long as the scheme holds its shares for three years, they can be passed tax free to the employees.
The scheme allows employees to buy shares in their company from pre tax salary as well as possibly receiving free shares.
The employee can sell the shares or keep them. If the employee would like to sell the shares the company can loan or make deductible contributions to the EBT to enable the purchase to occur. The EBT can then use those shares to satisfy future allocations of shares to employees recycling the shares.
Share Valuation Rules Debate
There has been discussion concerning the best and most efficient means by which the shares should be valued which is always difficult in small companies whose shares are not publicly traded and on whether the EBT should be obliged to hold its shares with a third party on deposit.
The sale by the employee to the EBT will be subject the Capital Gains Tax but is unlikely to exceed the annual exemption each year.
The proposal is therefore that there will be:-
Part of employees pre tax salary is allocated by agreement to purchase shares. This amount is paid into a trust which buys new shares from the employer. This income will not be subject to tax or national insurance. £1,500 may be allocated each year and full deduction for corporation tax will be available to the employer for this sum.
The employer will be able to provide free shares to match partnership shares acquired which may be known as ‘buy one get one free’.
The employer will be able to give free shares up to a value of £3,000 per annum and be able to offer free shares to different bases thus recognising individual or team performance
For free and matching shares, full corporation tax relief will be available for the cost to the employer and no requirement to account for PAYE or NIC at that point.
Employees can choose whether:-
- Dividends are to be paid out to employees and if so they will be taxed in the normal way
- If dividends are reinvested in shares in the company within 30 days these will be tax free subject to defined limits.
© Michael Reason LLM 2000-2004 |
