By Francesca James
Employees that opt for the Government’s new “employee-owner” contract could face an immediate and sizeable income tax bill, warns Ross Welland, a tax partner with accountancy firm, Littlejohn. Their employers may also be liable for an Employers NIC charge.
The new contract aims to reward employees who give up some of their employment rights with shares in the company that will be exempt from capital gains tax when sold. But employees may not be aware that by accepting the new contract they could be liable immediately for income tax on the value of the shares they receive.
The proposal was announced by the Chancellor of the Exchequer, George Osborne, in October and confirmed in The Autumn Statement on 5 December 2012 with final legislation in next year’s Finance Bill.
“Under the proposal employees will receive shares worth from £2,000 to £50,000 in exchange for employment rights. Because it will be hard to put a value on employment rights, and the type of shares that can be offered is also very wide, there is a very real prospect that employers may offer shares which far exceed the value of the employment rights given up,” explains Mr. Welland. “However, when the value of the shares granted to employees exceeds the value of the employment rights they give-up, the employee is immediately liable for income tax on the difference in value.”
A junior member of staff/part-time administrative employee earning, say £10,000 p.a. could be given shares worth £2,000 but the value attributed to the rights they give up in exchange is treated as virtually nil. In that case the employee could face an income tax charge on the £2,000 difference between the value of the shares and the value of the rights they gave up in exchange. The employee would then have £400 tax to find, with a possible further impact on tax credits claimed.
A more senior member of staff/middle manager with technical expertise of value to the employer might be earning say £50,000 p.a. They could be given shares worth say £50,000 in exchange for rights worth say £10,000. That would give a taxable difference of £40,000 which, taxed at 40 per cent, would give a tax charge of £16,000.
“Employees would be required to pay the income tax on receipt of shares. In some cases (primarily listed companies) that might be collected through the payroll as if it were a cash payment made to the employee in the month. In other cases income tax might be collected through the self assessment system after the end of the tax year,” says Mr. Welland.
“Calculating the income tax bill will be headache inducing,” he adds. “There is no hard and fast algorithm for calculating the value of an employee’s employment rights. The value of employment rights will also differ considerably depending on the individual employee and his or her role in the company. HMRC may take a different view on the fair value of the shares received by the employee which could result in sticky and unpleasant negotiations.
“‘Good’ employers will take on the burden of dealing with HMRC to safeguard their employees’ PAYE and NIC positions, perhaps applying for agreement on the value of the shares with HMRC before issuing the shares. But less caring, or less knowledgeable employers could leave employees with the responsibility of dealing with the Revenue alone.”