Commentary: Staff share schemes need help

BUDGET DAY is coming, yet many companies are holding back from announcing new all-employee share incentive schemes, instead waiting to see if Gordon Brown will make any innovative proposals.

In particular they are looking for help with the transition from existing PRP schemes, which are being phased out. In his pre-Budget statement last November, the Chancellor announced his intention to double the number of companies operating employee share option schemes across the whole of their workforce.

The subsequent consultation paper issued by the Treasury has produced 170 submissions from industry and analysts. However, this high level of interest will only help the Chancellor reach his target if he comes up with the goods in the Budget. He must address the reasons why smaller quoted companies are not using all-employee share schemes with the enthusiasm of the FSTE 100 companies.

There are two approaches the Chancellor might take. The easiest would be to address the problems with the existing share incentive schemes which benefit from Government tax breaks. There are two main types of scheme that might be simplified. The first is the Save-As-You-Earn share option scheme (usually called SAYE or Sharesave schemes), under which all employees can save on a monthly basis in a tax-free account and later use the savings to buy shares in their employing companies at a discount.

The other type, called a profit sharing scheme, gives tax-free shares to all employees on condition that they are retained by the employees for a minimum two or three year period. Both types of scheme are highly regulated by the Inland Revenue, making them very expensive to put in place and operate, and hitting smaller companies disproportionately. As the rules stand, for example, virtually every communication with employees relating to an approved scheme requires specific Inland Revenue approval.

Companies can obtain a corporation tax deduction for the profit made by their employees exercising SAYE options, and big companies can save millions. However, the procedure required for this tax saving is complex, and can outweigh the benefits for small firms. This could be avoided by a simple rule change. The Chancellor could also give tax breaks to new schemes, such as one in which employees can buy shares on a regular basis at a discount to their market value.

Lawrence Green is Employee Share Incentive Specialist at the national law firm Eversheds.