Concern is growing over the impact of the decision by HMRC to withdraw certain valuation checks for businesses providing shares to their employees. This runs counter to government ambitions to increase employee ownership in businesses and the “John Lewis economy” that Nick Clegg in 2012 said that he wanted to create.
The withdrawal of post transaction valuation checks and PAYE health checks by HMRC’s Share and Assets Valuation unit back in April is causing concern as employers don’t want to offer share plans where there is uncertainty over the tax implications because HMRC could choose to challenge the values used.
It is a longstanding tax principle that employees are taxable on all remuneration they receive from their employer whether paid in cash, as benefits in kind or in the form of shares. As a result, where an employee is awarded shares then they are taxable on the amount received unless the arrangement falls within a specific share scheme exemption. The value of this taxable income is relatively straightforward for quoted companies where the shares can be bought or sold for cash; however, for unquoted private companies the valuation can be a very grey area. It is also not generally possible for the employee to sell the shares to generate cash to pay the tax man.
“HMRC have defended this change in approach by saying that most companies putting in place share schemes use professional advisers” says John Endacott, Head of Tax at PKF Francis Clark, “and that is usually the case. However, we know full well that our clients want certainty; it’s a very big step for a small private company to issue shares to employees and it doesn’t take much to put them off. With changes such as these, companies should seek professional advice when looking to introduce new employee share plans”.
And it’s not just accountants who are raising concerns over this change which will have an impact on the South West because of the large number of private companies here. MPs on the Treasury Select Committee have also raised concerns as have the Employee Share Ownership Centre and Gabbi Stopp who is Head of Employee Share Ownership at Ifs Proshare, a forum for those administrating Employee Share Ownership in the UK.
“This change comes on top of restrictions to employee shareholder shares that were announced in the Budget” John Endacott continues “and our concern is that, despite positive noises by the Government, they are not as committed to employee shareholding as they first made out”.