Philip Hammond has revealed in his Autumn Statement that all tax relief will be withdrawn for employees who sign an employee shareholder agreement and receive ESS shares from 1 December 2016.
Employees who are prepared to surrender a bundle of employment rights (see below), by signing an employee shareholder agreement, can receive up to £2,000 of employee shareholder scheme (ESS) shares issued by their employer. These ESS shares are free of income tax and NIC for the employee, and the employer can deduct the cost of providing the shares from its profits for corporation tax purposes.
When the employee disposes of those ESS shares the first £100,000 of gains he makes is exempt from CGT. If the ESS shares were awarded under a shareholder agreement signed before 16 March 2016, the CGT exemption was restricted to £50,000 of ESS shares, as valued on acquisition.
The tax reliefs for the employee are removed for shares awarded under employee shareholder agreements entered into on or after 1 December 2016. However, the corporation tax deduction for the employer remains in place.
Any ESS shares awarded under employee shareholder agreements signed before 1 December 2016 will continue to qualify for both the income tax/ NIC reliefs and the CGT exemption.
George’s big idea
The ESS was one of George Osborne’s pet projects back in 2013. He was persuaded that where employees are more involved in the company that employs them, they are more productive. Inventing yet another employee share scheme was the way he chose to incentivise those employees.
To receive the free shares under the ESS an employee had to surrender all of these rights:
unfair dismissal, apart from when this is automatically unfair or relates to anti-discrimination law or health and safety
to request leave for studying or training
to request flexible working
statutory redundancy pay
Trade unions and others objected to the potential exploitation of workers at the time the ESS was launched. Tax advisers also warned that the ESS would be exploited by entrepreneurs who were not bothered about surrendering employment rights, when they owned a large slice of the company.
And so it has come to pass. By and large the ESS has not been used to incentivise ordinary employees. It is mainly used by high earners who award themselves shares in fast growing companies. When they sell those shares the vast majority of the gain is exempt from CGT.
I wish Chancellors would listen to tax advisers before launching new tax reliefs. The ESS was a car crash waiting to happen.