Employee shareholder status to be abolished

The tax-advantageous employee shareholder status (“ESS”) scheme is to be abolished from 1 December 2016, according to an announcement in the Chancellor’s recent Autumn Statement.

ESS was only introduced in September 2013, creating a new type of employment status. Designed to provide a tax-efficient way for employees to share in the growth of their employers, the scheme involves employees giving up certain core employment rights such as unfair dismissal and statutory redundancy pay in return for at least £2,000 worth of shares in the employer. The first £2,000 of shares is exempt from income tax and any gains made on the first £50,000 of those shares are exempt from capital gains tax.

As we reported at the time, the Government had something of a struggle to get this law passed due to opposition in the House of Lords. This resulted in various changes being made to the draft legislation, including the need for an individual to obtain independent legal advice - paid for by the employer - before becoming an employee shareholder.

There was also a widespread feeling at the time that the take-up by employers would be very low. It seems that this has indeed been the case. The Chancellor said that ESS is being abolished because of evidence suggesting it is primarily being used for tax planning by high-earning individuals, rather than supporting a more flexible workforce. It appears that ESS has been used as a tax avoidance vehicle by the wealthy, rather than as a tool to incentivise staff and create flexibility in smaller businesses as was the original stated intention.

The tax advantages linked to shares awarded under ESS will be abolished for arrangements entered into on or after 1 December 2016. This means it is already too late to start a new tax-efficient ESS arrangement from scratch because of the process that must be followed first, including the need for the employee to receive independent legal advice and have a seven-day cooling-off period before any agreement becomes binding. 

For the time being it will still be possible to agree a new ESS scheme with an employee under which employment rights are given up in return for shares, but without the tax advantages. It seems unlikely that anyone will want to do this. The Autumn Statement also said that ESS itself will be closed at the next legislative opportunity, so it looks likely to be abolished altogether in the near future.

In a related development, the Business, Energy and Industrial Strategy Committee has recently launched an inquiry into the future world of work, including consideration of the rights and status of different types of worker and employee. The abolition of ESS will at least remove one type of employment status from the mix. In truth, however, the previous Coalition Government’s plan to create a new flexible workforce invested in their employers’ businesses evidently never really got off the ground.