As reported in November's newspad, on Wednesday October 25 2023 the Centre hosted an online chat on current hot topics in employee share ownership.

The event was chaired by Centre chairman Robert Pay and the discussion led by Jennifer Rudman, member of the steering committee and industry director at Equiniti. They were joined by around 15 share plan enthusiasts.

Topics on the agenda included: Looking back at the Call for Evidence on SAYE and SIP; Thoughts on the consultation on taxation of Employee Ownership Trusts and Employee Benefit Trusts; SAYE bonus rate – how it’s going, what’s happening in practice; the drop in annual dividend allowance.

The discussion was run under the Chatham House Rule. Many thanks to all who took part.

Looking back at the Call for Evidence on SAYE and SIP

Jennifer told us that Equiniti canvassed over 120 people in preparation for its response. Its survey revealed that many clients wanted to keep SIP & SAYE, 70 percent saying that, although the plans were fulfilling their policy objectives, improvements were needed.

Equiniti’s response had nine key recommendations, largely in line with the rest of the sector. Top asks for SIP were reducing the tax free holding period from five to two or three years and amending the tax treatment for dividends. For SAYE, top recommendations were to amend the good leaver rules so employees can exercise their options if they have resigned, and changing capital gains tax treatment of SAYE exercises.

Comments:

• Reduction of the five-year tax free holding period: The ask was for reduction to two or three years, main reason being that three years would align with executive share schemes. The different treatment of an all-employee plan, as compared with a discretionary plan does not fit with government policy to encourage wider employee share ownership. The sector has been asking for this for many years and, even though it has been rejected in the past, times have changed and people expect to move jobs more frequently now.
• Treasury reason for not shortening time periods is often “retention”, possibly looking at retention too narrowly; having something that is attractive to people is much more likely to incentivise and retain employees than forcing a time period that seems unreasonable.
• Companies put in SIP and SAYE schemes to provide employee benefit and financial underpinning. Providing something that can help employees that way, does not have a massive impact on retention (only unusually huge gains e.g. some of the SAYE schemes now maturing, where shares were bought at low prices during Covid, where a substantial number of employees stayed longer to benefit from these gains).
• Private companies see SIP as a tool for investment into the company, as, especially in a smaller business, employees can see that they have a direct impact on profitability and returns. So it is more about ownership and having a direct connection with the company’s profitability. Retention is not driving the demand for SIPs, and all private companies surveyed said five years is too long.
• Timing of government response: we can expect, at least an indication of Treasury thoughts, though probably not a full response, around the end of November. This would coincide with the autumn statement, so potentially any significant changes will be announced.

Thoughts on the consultation on taxation of Employee Ownership Trusts and Employee Benefit Trusts

Comments:

• As it was heavily flagged as an EOT consultation, some were surprised by the extra questions on EBTs. This drew concerns that HMRC may be trying to put more difficulties in the way for private company EBTs. (Though this was an opportunity to make the point to HMRC that maybe it is time to have a safe harbour employee benefit trusts for private company shares).
• The obvious concern for HMRC is that EOTs should not be used as tax avoidance vehicles. We can understand the concern and don’t want to see EOTs being abused, but want use of them to be encourage for the right purposes.
• Published data on why EO businesses outperform shows that the key element is a serious attempt to engage employees, especially with top-level endorsement.

Key points of the consultation:

• Makeup of the EOT trust board – agreed it should not be made up of majority vendors; but want to ensure the rules around makeup of the trustee board are not too rigid, especially for smaller private companies. Guidance would be better than legislation. The position which currently exists for EOTs is that it is possible for the vendors to establish a majority, or even a totality of directorships of the trustee board, thereby taking total control of the EOT. The way to decouple the vendor shareholders from control of the EOT board is to establish independent trustees. But where is the expertise in this for the UK? – It is in the Channel Islands especially.
• Whether EOTs should be based in the crown dependencies (mainly done to protect future CGT clawback) – Many providers don’t set up EOTs off-shore, out of misplaced PR considerations. If we want to get away from vendor controlled EOT boards, the obvious way is to draw on the reservoir of expertise and jurispridence in Jersey and Guernsey.

Proposals put forward:

• Definition of excluded participants (the 5% Rule) – i.e. someone who has five percent or more of any class of shares in the company. In private companies it is common to have an employee share scheme with a different set of shares, so it is easy for employees to hold five percent of the employee share class, making them an excluded participant. This goes entirely against the government’s intention to create wider employee ownership especially in SMEs. The definition should be changed to five percent of the share capital overall, rather than five percent in any one class.
• End game of the EOT: There should be a mechanism to prevent quick sale turn-around, e.g. a long stop date, of perhaps 10 years. This would give plenty of time to protect employees being affected by a quick sale which would not be in the interest of the EOT or in the spirit of the legislation. It is inevitable that the EOT company will be sold on at some point, but it seems harsh that employees and/or trustees should be on the hook for that more than 10 years after the original transaction. The intention should be that the EOT, if not for keeps indefinitely, should be for the long term.
• Valuation-Trustees paying too much for the company: EOT valuation is currently dependent on the interaction between tax and trust law, such that the trustees would be in breach of trust should they agree a valuation that was in excess of market value, and there is always pressure, from the vendor shareholders, to have a handsome value position. A way round this would be to introduce an HMRC SAV type agreement such as we are able to have by way of clearance from HMRC SAV for SIP, EMI, SAYE and CSOP. This would ensure independent adjudication that is not being put under pressure to establish by the vendor shareholders. Another recommendation was to put in a sunset clause, e.g. if you have not paid off the debt within 10 years, you’re ‘off the hook’. (If you have not been able to pay to the value set at transaction date, then effectively the company was over-valued). This would offer some protection to the trustees and employees.
• Increase the tax free bonus limit – if the bonus limit on SIP is increased, but not on EOTs, we are going to want to know a reason why.

Are employees benefiting appropriately?

• They receive the tax free bonus, though there is a split between companies who pay the bonus immediately and those that wait till ‘financial freedom day’, when the debt has been paid off. Main concern is that we lose sight of the question: What is in it for employees, financially? The bonus, which should be increased, appears to be a substitute for capital gains and dividends, which seems to defeat the objective of an employee share scheme. Although the EOT falls within the definition of an employee share scheme under the Companies Act, in practice it is not possible to deliver a capital gain or dividend return. A solution is to introduce an EMI or SIP scheme to run alongside the EOT.
• Other benefits for employees, which might be termed ‘soft benefits’, e.g. having employee councils, employee input, transparency and having a say in how the business is run. These are long term benefits, though businesses who want to set up an EOT, tend to be employee orientated anyway in providing a progressive approach to training and development, or have embraced a meaningful approach to delegating responsibility.
• One major change would be to allow EOTs to appropriate shares from employees and to make introduction of an EOT dependent on the introduction of direct employee share ownership alongside.
  
  

SAYE bonus rate – how’s it going, what’s happening in practice?

The bonus rate was reintroduced on August 18 2023. Jennifer told the group that Equiniti has done around 40 launches since then, so is into the routine of bonuses being paid. Discussions now are around timetables, how they are now changing re base rate changes.

Points raised:

• Paragraph seven of the prospectus and the three-month rule – If there is a change after you have sent the invitation, and either the bonus rate or the prospectus changes, you will need to have a contract start date within three months of that change.
• Headroom issues – Do the scheme rules allow you to exclude the bonus when you are doing the option calculation, whether you can exclude it at invitation, and whether you can exclude it if you then do a ‘scale back’?
• Notional bonus rates – Should they be given for international SAYE schemes?
• Participants and companies have seen the reintroduction of the bonus rate as a positive but there are some, because of headroom issues, that are not including the bonus in the option calculation. However, this can still be a positive if it is given as a cash bonus.
• It is positive that there are either cash or options being granted with that extra bonus. It is most usual though that the bonus is used to calculate shares under option. Only if there are headroom issues would you be excluding the bonus from that option calculation, since the objective is to maximise the employee benefit.

The drop in annual dividend allowance

The allowance dropped from £2000 to £1000 in this tax year and is set to drop further to £500 in April 2024.

Many more SIP participants will have to pay tax on their dividends. Companies need to analyse the impact on employees and then decide whether to introduce dividend reinvestment within the plan, so that the drop in allowance does not have such a big impact; to look at where they are giving employees a choice between cash and dividend shares, what the percentage split is on that and whether employees need reminders of the benefits of dividend reinvestment.

There is no objection to people paying tax, but lower paid workers should not suddenly need to submit self-assessment tax returns or contact HMRC for a tax code change. Many employees will not be aware of dividend tax, so more help and support is needed.

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