Income Tax and Capital Gains Tax: employee shareholder status
Published 23 November 2016
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Who is likely to be affected
Companies which are considering making new employee shareholder agreements, individuals who have been offered - but have not accepted - employee shareholder status as at 23 November 2016, and advisers who supply independent advice to people considering entering into an employee shareholder agreement.
General description of the measure
The measure removes the Income Tax reliefs on the receipt or buy-back of shares issued to an employee under an employee shareholder agreement made on or after 1 December 2016. It also removes the Capital Gains Tax (CGT) exemption relating to shares received as consideration for entering into an employee shareholder agreement on or after the same date. Shares received under agreements made before that date are not affected. Corporation Tax reliefs for the employer company are not affected.
Policy objective
The measure is part of the government’s wider policies of sustainability and fairness in the system of tax reliefs. There is evidence suggesting that the employee shareholder status is not being used as intended by companies.
Background to the measure
The measure was announced at Autumn Statement 2016.
Detailed proposal
Operative date
The Income Tax reliefs and CGT exemption will no longer be available with effect from 1 December 2016 on any shares acquired in consideration of an employee shareholder agreement entered into on or after that date. This will allow any individual who has received independent advice regarding entering into an employee shareholder agreement before the 23 November 2016 the opportunity to do so before 1 December (but not later) and still receive the income and CGT tax advantages that were known to be available at the time the individual received the advice. The effective date is to be the 2 December where independent legal advice is received on 23 November prior to 1.30pm.
Current law
Current law is included principally in section 58 and Part 7 of the Taxation of Chargeable Gains Act 1992; Chapter 12 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003; section 385A of the Income Tax (Trading and Other Income) Act 2005 and Parts 12 and 20 of the Corporation Tax Act 2009. Other relevant provisions are in Chapter 11 of Part 4 of the Income Tax (Earnings and Pensions) Act 2003.
Proposed revisions
The proposed revisions are restricted to the Taxes Acts. They don’t extend to employment law. The government has announced its intention to close employee shareholder status to new users at the earliest opportunity, however the status will remain open under the terms contained in the Employment Rights Act 1996 until relevant legislation is passed.
Legislation will be introduced in Finance Bill 2017 to amend Chapter 12 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 so that the full value of shares received as consideration for entering into an employee shareholder agreement constitutes earnings of the recipient. Section 226A(3) and sections 226B to 226D will be omitted. Consequential changes will be made to the Corporation Tax Act 2009.
The Taxation of Chargeable Gains Act 1992 will be amended so that CGT will be chargeable on all gains accruing on disposals of shares received as consideration for entering into an employee shareholder agreement. Losses on such disposals will be allowable losses. Sections 236B to 236F will be omitted and consequential changes will be made to sections 58 (spouses and civil partners) and 149AA (restricted and convertible employment-related securities and employee shareholder shares).
Section 385A of the Income Tax (Trading and Other Income) Act 2005 will be omitted so that if an issuing company buys-back from an employee shares which were issued to that employee as consideration for entering into an employee shareholder agreement, the payment given by the company may be taxed as a distribution in respect of those shares.
These changes apply only to shares acquired in connection with employee shareholder agreements made on or after 1 December 2016.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
| negligible | +10 | +15 | +15 | +25 | +50 |
These figures are set out in Table 2.1 of Autumn Statement 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
The costing accounts for a behavioural response whereby some of the population affected find alternative routes of tax planning.
Impact on individuals, households and families
Only individuals who become Employee Shareholders on or after 1 December 2016 will be affected by this measure.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure is not expected to have a disproportionate impact on people in groups sharing protected characteristics in any income groups. However, it is likely that the individuals’ benefiting from the cut will share characteristics with others of above average means.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses and civil society organisations. Affected businesses will incur negligible one-off costs of familiarisation with the new rules. They may also incur negligible costs to change systems and processes, these systems are likely to be in place in the majority of cases.
Businesses will not have any additional on-going costs associated with reporting employees’ taxable income in respect of shares received. In some cases businesses may need to report taxable income, where they did not previously, in total these are thought to be negligible.
The ability of a company to offer employee shareholder status to its employees, and the Corporation Tax reliefs available to the company when doing so, will not be affected by this measure. However, the government has announced its intention to close the status to new users at the earliest opportunity.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
There will be an operational impact on HMRC in the region of £250,000 per year in administering this change.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Ben Martin on Telephone: 03000 520630 or email: benjamin.martin@hmrc.gsi.gov.uk.
Declaration
Jane Ellison MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.