The Government needs to reduce the tax uncertainty associated with changing ownership structures if it wants to encourage employee ownership of businesses, says international law firm Pinsent Masons.
A Government consultation on how it should respond to July’s Nuttall Review on employee ownership closed on Friday 7 September. The Nuttall Review recommended the Government introduce a ‘right to request’ employee ownership for employees and make efforts to increase awareness of employee ownership opportunities. Judith Greaves, Partner at Pinsent Masons, says: “There are some simple steps the Government can take to promote employee ownership. Many unlisted firms are enthusiastic about employee-ownership, but this enthusiasm can evaporate as they start to consider the long list of issues to be overcome.” “There are now more technical hurdles to jump. It used to be easier.”
Judith Greaves adds: “It would be a huge help for those considering employee ownership if there was just one central team at HMRC that could deal with all tax related enquiries.”
“At the moment, enquiries about the tax implications of an ownership change may need to be directed to a bewildering array of different teams and offices dealing with different taxes. Smaller businesses often don’t have the time or resources to follow through on their plans, or they can’t afford the advice needed to navigate the way through.” Many of the tax issues have been identified in the Office of Tax Simplification interim report, which asks for further input by October 26, with a view to the OTS publishing a final report before the 2013 Budget.
Pinsent Masons says it’s important to keep in mind – as the Nuttall Review points out – that the model a company will use to adopt employee ownership will differ according to its circumstances. For instance, a “trust model” which Nuttall reports as being advocated by many respondents, involving long term ownership of the company by an employees’ trust, with employees never acquiring shares direct, will not suit all commercial situations. Companies will often want to move gradually in the direction of greater employee ownership. Pinsent Masons says that uncertainty around how HMRC may value shares for tax purposes and the unintended consequences of tax avoidance legislation also create headaches for businesses attempting to introduce employee ownership.
Judith Greaves explains: “Other than in the context of HMRC approved plans, there’s no set procedure for agreeing share values until after their acquisition. This creates the risk that employees and employers could be faced with bigger than expected tax bills. Certainty on valuation would help encourage much greater take-up of employee ownership.” Judith Greaves adds: “The Government’s understandable wish to tackle tax avoidance has resulted in additional obstacles.” “The rules introduced recently to counter ‘disguised remuneration’, for instance, can cause extra problems for unlisted companies seeking to use an employees’ trust as part of their employee ownership arrangements. The Government needs to think about how it could exempt genuine attempts to create employee ownership from over-bearing avoidance legislation. Perhaps there could be a ‘safe harbour’ in defined circumstances.”
