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Employee Share Schemes - The Impact of Brexit

31 August 2017

Brexit dominates discussions of politics, economics and social change. It is a trite observation that the only certainty with Brexit is uncertainty.

Amidst the fundamental and long reaching effects of the outcome of the Brexit discussions, we are asked for our view on the impact on employee share schemes.

As with the wider issues, the essential answer, particularly when considering specific technical areas, is that we do not know. Equally, there are some indicators of the potential impact.

Policy

The first question is whether Brexit is likely to affect Government policy in relation to employee share schemes.

There has been a long history in the UK of providing tax incentives to encourage the use of employee share schemes. This can be traced back to 1978 with the introduction of HMRC approved profit sharing schemes and with the range of tax advantaged plans supported by legislation today. See further details in our discussions of Employee Ownership TrustsEMICSOPs and SIPs and SAYE plans.

International Developments

This is not limited to the UK as demonstrated by our recent commentary on developments in the United States.

Tax incentives for appropriately structured employee share schemes feature in countries across the Globe. The UK has been one of the leading countries in this approach and, subject to the specific comments below on EMI, we expect this to continue.

Business Drivers

The uncertainty created by Brexit impact on business and business confidence. This has been seen following the 2017 election result. Will this deter companies from establishing share schemes?

The answer to this is that it might but, in our view, that would not be the right commercial response.

To explain why we believe this, it is necessary to consider some of the basic rationales for adopting employee share schemes and their economic effect. There is a recognition that adopting an employee share scheme:

  • Facilitates the alignment of employees with shareholders.
  • Enables employees to share in the “wages of capital” thereby allowing them to benefit from investment growth.
  • Encourages productivity improvements.

In addition, offering equity is a form of variable pay. This can assist companies to manage economic turbulence and dips in corporate performance without necessarily reducing the workforce. This provides greater job security and helps companies to maintain the level of the workforce required to meet increasing demand when there is an economic upturn.

Given the uncertainties with Brexit and the potential for this to impact negatively on business confidence and business performance, this suggests that Companies should include extending employee share schemes as part of their Brexit planning.

Specific Concerns

There are particular areas of technical concern with the Brexit process as it impacts on employee share schemes:

EMI – the generous reliefs for Enterprise Management Incentives (or EMI) for trading companies with less than 250 employees is dependent on a derogation from EU State Aid rules. These are likely to become irrelevant from Brexit taking effect in 2019 but the existing relief from those rules expires in 2018. In the Spring Budget 2017, the Government announced that it would seek approval for the continuation of the exemption from EU State Aid rules, however, such an extension requires EU co-operation and so concerns remain that achieving this exemption for EMI may be complicated by the Brexit negotiations which will be underway at this time.

Passporting Rules – under the passporting rules relating to Prospectuses, an exemption from the publication of an approved prospectus by companies is given for offers of transferable securities to existing or former directors or employees satisfying the relevant requirements across the EU. If these do not survive Brexit, the ability to establish and operate employee share schemes across Europe cost effectively may be significantly inhibited.

Overview

Employee shares schemes are unlikely to be high on the list of priorities in Brexit negotiations. This accentuates the uncertainties about the future of employee share ownership and the related web of tax and legal incentives.

This means that plan issuers and advisers need to maintain a close watch on developments. This does not affect the fundamental benefits of running an employee share scheme and to some extent emphasises them due to the risk and cost/benefit sharing effects of plan participation.

Pett, Franklin & Co. LLP are experts in employee share schemesexecutive incentives and share valuation. To find out more about how we can help you or your client, please contact Stephen Woodhouse at stephen.woodhouse@pettfranklin.com or call 0121 348 7878.

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