Share scheme rules need overhaul

EMPLOYEE SHARE OWNERSHIP

Share scheme rules need "radical" overhaul

The tax regime for employee share plans is "incredibly complex" and requires a "complete review", according to a new report by KPMG, an accounting firm.

David Tuch, a partner at KPMG, believes that the existing rules do little to encourage the long-term holding of shares by employees. "Our experience is that the average participant in an employee share scheme looks upon his participation as a windfall bonus rather than a nest-egg for the future," he says.

New schemes being used "very narrowly"

What's more, although the two new style share plan introduced last year have been warmly received, Tuch argues that this should not "be taken to mean that the problems of employee share ownership have been 'fixed', or that the government's objectives are now on course for achievement".

Companies are using the all-employee share ownership plan and the enterprise management incentive in a "very restricted way". Says Tuch: "Faced with a wide choice of design features, the average employer is introducing an extremely simplified AESOP which is little more than a glorified staff savings scheme."

A radical approach

So, what would an ideal tax system for employee shares look like? Tuch suggests the following features:

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It would be simple to understand and drafted with clarity (reducing the need to retain solicitors and accountants).

The tax liability would be reduced as the employee held the shares for longer.

The tax liability would be easy to calculate, and would not force the employee to sell the shares in order to pay it.

Employers would be able to devise and implement whatever share schemes they considered necessary to incentivise their workforce to achieve productivity gains, rather than being forced to comply with limited and inflexible legislation.

The tax regime would take into account the difference between shares in a large listed company and other shares, in a constructive and intelligent way.

This could be achieved relatively simply in the following manner:

Have only one tax-charging section for all employee "bona fide" share schemes (but ensuring that the anti-avoidance provisions were sufficiently robust, to protect the tax base).

Take shares acquired under "bona fide" employee share schemes outside capital gains tax altogether.

Take shares acquired under "bona fide" employee share schemes outside PAYE.

Introduce interest relief for loans to acquire shares in any unquoted company, or which are acquired under an all-employee scheme (thereby reducing the pressure to sell shares following option exercise).

Defer the tax point until sale of the shares.

Taper the taxable amount in line with the length of ownership of the shares (or interest in shares if longer - for example from date of grant of an option until sale of shares).

Source: "A radical approach to the taxation of employee share plans", by David Tuch, KPMG.

Want to know more?

Title:

Availability: Contact David Tuch at KPMG, email david.tuch@kpmg.co.uk or complete an online order form www.kpmg.co.uk/kpmg/uk/ContactUS/contactus_entryform.cfm.

Take a look at the KPMG web site to find out more . . . www.kpmg.co.uk

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Share scheme rules need overhaul