18 January 2012
Press ReleasesNick Clegg has today called for companies to offer shares to their employees to create what has been called a 'John Lewis economy'. The Deputy Prime Minister, who is also calling for tax breaks to encourage companies to put in place share ownership schemes, claims that businesses owned by employees are more dynamic and enjoy higher morale.
Employee share ownership is well used in many listed companies, but will be of little benefit to the vast majority of UK businesses, say accountants and business advisers James Cowper Kreston. It may even result in employees facing high tax charges.
Sharon Bedford, a Business Tax partner in James Cowper Kreston’s Oxford office says: “Many entrepreneurial businesses that have an exit strategy in mind – such as a trade sale or stock market listing – already use employee share ownership schemes to incentivise staff. It works well as employees can benefit from share ownership when the company is sold or floats.
“However, for the vast majority of privately owned businesses it is a tax nightmare and offers no real incentive for employees. Because of mind-bogglingly complex changes made to the tax rules by Gordon Brown in 2003, employees may find themselves facing an upfront tax charge on receipt of any shares and then find that there is no way for them to benefit from ownership. Share ownership is also unlikely to result in any greater say in the running of their company.
“Many businesses shy away from such schemes because of the complex tax positions that arise when employees leave the business and the shares are bought back.”
There are however measures that the Government could adopt to encourage greater employee share ownership, says James Cowper Kreston.
Chris Lee, a Business Tax partner in James Cowper Kreston’s Reading office, adds: “The Government should immediately defer the tax charge made on employees who receive shares in their employer’s business until those shares are sold.
“The Government should also look at tax relief on profit shares. Until 1997 it was possible to pay up to £4,000 to employees as tax free profit related pay. The Conservative government, in 1997, abolished this relief. Perhaps Nick Clegg might wish to look to reinstate it if he really wants to help incentivise employers and employees.”
Chris also points out that John Lewis staff do not technically own any shares in the company: “All shares are held in trust for the benefit of employees, who then receive a share of profits as a salary bonus – ideally suited to profit related pay, but a different position to employee share ownership.”
He concludes: “There are some interesting ideas being discussed, but the Government really ought to talk to businesses first before proposing any such reforms.”
Sharon Bedford, Partner, James Cowper Kreston LLP, Tel +44 (0)1865 861166 or email sbedford@jamescowper.co.uk
