Axing perk of millions would prompt outcry

The Chancellor, Kenneth Clarke, would face a large-scale revolt if he abolished tax relief on profit-related pay (PRP). Since it costs pounds 800m compared with the estimated pounds 70m attributable to the relief on executive share option schemes, it is a highly attractive prize to the Treasury. But the fact that it benefits 2.4 million people - many more than the number covered by share option schemes - also makes it a huge potential vote-loser.

One employee remuneration expert predicted that the outcry would dwarf the protests caused by last week's options announcement.

This is why tax experts regard any move as unlikely. The Government has remained committed to it since Nigel Lawson's 1987 Budget because, along with Save As You Earn and profit-sharing schemes, it is felt to encourage wider share ownership. There is said to be no indication that the Inland Revenue regards the system as under threat.

Whitbread, the brewing company, became one of the largest companies to take up the scheme when it announced a plan that it said could increase take-home pay by pounds 9m a year for its 60,000 full and part-time staff. The company said the scheme was working well but would not comment on its reaction to any changes.

But even adherents of PRP accept that it might be vulnerable to a government anxious to obtain as much revenue as possible without actually raising taxes, as happened with relocation expenses.

Not all profit-sharing schemes are eligible for the tax break, which now stands at pounds 4,000 or 20 per cent of pay, whichever is the lower. To qualify, a scheme must benefit employees pretty much alike; it can only differentiate on the basis of basic salary or length of service and not according to perceived value to the organisation.

Brian Friedman, head of the employee benefits practice at accountants Arthur Andersen and a self-confessed "addict" of PRP, is convinced that the system has largely achieved its objectives. He sees it as producing a "win, win, win situation" because the employees get part of their salary tax-free, the company is able to raise pay at no cost to itself and the Government keeps inflation and unemployment down.

"I would be surprised if the Government does anything about PRP, partly because they believe in it in principle and partly because it is so popular," he said.

However, others acknowledge that PRP has been used as a tax dodge, at least at the fringes. For instance, Ian Nichol, head of the PRP service at accountants Coopers & Lybrand, said certain professional firms that paid employees through service companies because partnerships are not required to report profits had been able to eliminate much of the risk by predicting payouts. The Revenue blocked loopholes associated with artificial formulae for calculating the payout in 1992, but there is still a perception that abuses exist.

Others suggest that the whole idea is little more than a scam, with companies only adopting the schemes because their tax-efficiency makes it good business to do so. They argue that schemes not approved by the Revenue provide a better link with performance.

Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Guru Careers: Communications Exec / PR Exec

£25 - £30K: Guru Careers: We are seeking a highly-motivated and ambitious Comm...

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

Day In a Page

On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific
In this the person to restore our trust in the banks?

In this the person to restore our trust in the banks?

Dame Colette Bowe - interview
When do the creative juices dry up?

When do the creative juices dry up?

David Lodge thinks he knows
The 'Cher moment' happening across fashion just now

Fashion's Cher moment

Ageing beauty will always be more classy than all that booty
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

Health fears over school cancer jab

Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

'I forgive everyone, but I don't forget'

Fifa president Sepp Blatter issues defiant warning to opponents
Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

Weather warning

Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

High hopes for LSD

Meet the volunteer users helping to see if it cures depression and addiction
German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

Saving Private Brandt

A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral