A couple of items relevant to employee shareholder status shares (ESSs) have appeared this week.

First, HMRC reported in its latest Employment-Related Securities Bulletin that the Department for Business Innovation and Skills (BIS) has confirmed that already-issued shares – for example, those held by a shareholder or an employee benefit trust – can be used as ESSs.  This sounds like excellent news for companies, because of the problems arising from the rule that employee shareholders mustn’t give anything for ESSs other than entering into the ESS agreement.  As it’s unlawful for companies to issue new shares without payment of at least the nominal value, extra arrangements have to be put in place to fund the issue of these shares.

However, the legislation governing ESSs is very clear.  It says that an individual will become an employee shareholder only if the company “issues or allots” the shares to him or her.  HMRC has confirmed that there are no plans for the BIS guidance on ESSs to be updated or, more importantly, for the legislation to be amended.  So companies using arrangements where existing shares are to be used as ESSs should be aware of the risk that, should everything go pear-shaped down the track, the employee could argue that he had not validly given up the relevant employment rights, particularly the rights to claim for unfair dismissal and receive statutory redundancy pay.

Second, amongst Labour’s various manifesto pledges, it has confirmed in its announcement on tackling tax avoidance that its first Finance Bill will include “scrapping the ‘Shares for Rights’ scheme”.  This echoes Nick Clegg’s speech at the Liberal Democrats’ autumn conference, which in turn reinforced their statement on ESSs as long ago as 2013 (see our previous post).

It’s clear that ESSs are not being used for the purpose they were intended – that is, to encourage lots of employers to increase employee ownership.  There are two telling little statements hidden away in the minutes of the September 2014 meeting of the Shares and Assets Valuation Fiscal Forum.  In the first year of the arrangements being available, 227 valuations for ESSs had been agreed and they “appear mostly to have been granted to senior staff”.  In other words,the shares are being issued to managers who are senior and savvy enough not to be bothered by giving up some of their employment rights (which can be restored by a separate contract anyway) and can perhaps afford to pay a little upfront tax in return for the prize of unlimited tax-free uplift on shares worth up to £50,000 at the outset.

Whichever party (or parties) get in at the election, it seems that the days of ESSs could be numbered…