There are several critical requirements that must be satisfied to ensure that employee shareholder status is obtained, and thereby the tax breaks for the employee shareholder and fewer employment rights for the employer to worry about.  One of these essentials is that the shares given to the employee are worth at least £2,000 at the date of issue, so the accurate valuation of shares will be key.  Assuming that employee shareholder shares are most likely to be used by private companies, the expense of obtaining a professional valuation (and the risk of not obtaining one) made it even less likely that such companies would use this new status.

In the nick of time, HM Revenue & Customs has recently announced a procedure for agreeing the value of a share in a company intending to create employee shareholders “for tax purposes” (and presumably no other purpose, such as ensuring that employee shareholder status is achieved).

HMRC have confirmed to us that:

  • The procedure will be much like agreeing a share value for the purposes of granting an Enterprise Management Incentive (EMI) option.
  • HMRC will publish a form on which to make these applications, which they hope will be available by the end of August (unfortunately somewhat late, since it is supposed to be possible to enter into employee shareholder agreements from 1 September).
  • As for EMI valuations, supporting documents and information will have to be provided.
  • The procedure has been put in place to ensure that the employee can have comfort as to his tax position before he becomes an employee shareholder.
  • The letter of agreement will specify the actual market value (AMV), which takes into account any restrictions on the shares, and the unrestricted market value (UMV), which disregards them.
  • AMV will be for the purposes of the employee knowing how much (if any) income tax he will have to pay upfront when the shares are issued to him.  Or, put another way, how many of his employee shareholder shares are within the £2,000 income tax-free limit.
  • UMV will be for the purposes of assessing how many of the shares the employee receives fall within the £50,000 upper limit – that is, how many shares he can dispose of before incurring a charge to capital gains tax.

Employee shareholder status is still receiving a rough ride, with the Liberal Democrats’ recent announcement that they would repeal the legislation: LD paper on taxation*.  It remains to be seen whether this new procedure helps companies venture into the brave new world of employee shareholder status.

* Since this post was written, the libdems.org.uk site link to the LD paper on taxation has either been moved or removed. The paper was previously available at: libdems.org.uk/siteFiles/resources/docs/conference/2013%20Autumn/Policy/111%20-%20Fairer%20Taxes.pdf.