Tax experts note holes in planned rights for shares scheme

LONDON Fri Oct 12, 2012 11:55am EDT

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LONDON Oct 12 (Reuters) - A plan to allow British employers to give shares to workers who sign away employee rights could leave the same staff with soaring tax bills, experts warn.

The controversial scheme, unveiled by Chancellor George Osborne earlier this week, will see workers surrender perks such as flexible working or redundancy entitlements in exchange for shares worth up to 50,000 pounds in the company they work for.

The government said the scheme would make labour laws more business friendly by better aligning employee interests with management and giving participating staff a bigger share of corporate profits.

It would also unlock cash for executives to invest in business growth or create new jobs.

But questions about exactly how the scheme will be implemented are drowning out talk on the possible benefits.

"There's a whole load of detail missing, so one needs to be careful about going for it or against it too quickly," said David Ellis, a partner at KPMG.

Under current tax rules, if an employer gives a staff member 5,000 pounds worth of company shares, and the employee pays nothing for them, the employee will still be taxed as if they have just received 5,000 pounds of additional income.

"Will participants get tax relief on the receipt of shares? If they don't, there'll be a reasonable number of employees who won't be able to bear the upfront cost," Ellis said.

And while staff will be permitted to keep all their gains on the eventual sale of shares, they could end up subject to the same tax on dividends as if they bought the shares conventionally, without having to give up any workplace rights.

Ronnie Ludwig, partner at accountants Saffery Champness, said most companies would have to perform exceptionally well over time for employees to benefit from any tax advantages.

Under existing rules, UK citizens already benefit from a five-figure tax-free allowance.

"The question you've got to ask yourself is why would an employee do it? First of all, you've got a 10,600 pounds exemption on capital gains anyway," he said.

"If you are given 5,000 pounds worth of shares, and these shares double in value over a period of time, of which 5,000 is a capital gain, that will be exempt anyway under the 10,600."

Concerns abound over valuation and liquidity, especially for staff holding shares in privately-owned companies.

"Two valuations will be required - one of the employment rights given up and another of the valuation of the company shares," Frank Nash, Tax Partner, Blick Rothenberg said.

"Valuing shares in unquoted companies is extremely difficult and it seems that a valuation will be needed at least annually for a growing business taking new workers on board."

Some experts also highlighted a need to clarify exactly who is eligible for the scheme to prevent the capital gains tax relief being used as a tax avoidance scheme by top executives.

"If you are thinking about setting up a business... it would be a complete no brainer to do this - you are never going to sack yourself - so you could do this and you have 50,000 pounds worth of the companies' value that you won't pay tax on when you exit," Simon Allum, senior associate at lawyer Lewis Silkin, said.

STILL TIME TO PERFECT

The chancellor has offered little detail on the tax treatment of income generated, leaving some experts wondering whether this could be another tactic to grow income tax receipts without a commensurate rise in employment.

"The nice thing about this government is they give you a lot of policy a long way in advance of actual implementation," said Chris Groves, a partner at lawyers Withers.

"The downside to that is you get not a lot of detail of something that may happen so you find yourself in a limbo period of knowing something is going to happen but not being able to say very much about it," he said.

Some experts point out the benefits may also not be apparent to employers.

"There's nothing that tells us whether you walk out of the company a day after you get them what happens to the shares?" said Saffery Champness' Ludwig.

"And what if you've got someone who's been a really difficult employee and you want to fire them? They've still got shares in the company and they can come to shareholder meetings. If a dividend is declared, they are entitled to that dividend. Shareholders have got rights."

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