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.