Budget 1999: Share Ownership - New chance for workers to buy into their firms

FOR THE first time, employees will be able to buy shares in their company from their pre-tax salary as well as receiving free shares, under an ambitious "Shares for All" scheme outlined by the Chancellor yesterday.

Employees will able to put up to pounds 1,500 a year into the Chancellor's proposed employee share scheme, and could receive up to another pounds 3,000 in shares free from the company.

The scheme, which Mr Brown hopes will double employee share ownership in the UK, will be both income tax and capital gains tax free, as long as the shares are held for a minimum of three years.

Employers will get income tax and national insurance contributions relief if they choose to "match" the share purchases of their employees.

Business and industry gave a general thumbs-up to the Chancellor's plans for "employee share ownership for all" but expressed fears that the tax treatment and general red tape associated with the planned scheme might put companies off.

In particular there were fears that smaller, private companies - the entrepreneurial ones that Gordon Brown wants to encourage - might find the proposed scheme too expensive to implement.

Mr Brown said that "employees will be able, for the first time, to buy shares in their own companies from their pre-tax income. Every employer will be able to match, tax-free, what each employee buys".

The Chancellor promised to consult with accountants, lawyers and industry to fine-tune the scheme before launching it in next year's Budget.

Gill Nott, chief executive of ProShare, the organisation which encourages wider share ownership, hailed the Chancellor's proposals as "the best Budget for employee share ownership for many years".

"We are absolutely delighted that employees will be able to invest in shares out of pre-tax income and that companies will be encouraged to match that investment," Ms Nott said.

She did, however, criticise a sting in the tail to the Chancellor's plan; an income tax claw-back which may be incurred on up to 100 per cent of the value of the shares when they are sold. This would be tapered to 80 per cent if the shares are held for a minimum of 7 years, 60 per cent for 10 years, and just 40 per cent for more than 10 years.

Ms Nott said this was the only bad point in the Chancellor's otherwise excellent plans: "ProShare would like to see [the claw-back] tapered to zero."

Other features of the scheme include tax benefits and payroll savings to encourage employers to set up the scheme.

Alex Henderson, senior tax manager in the accountancy firm Arthur Andersen, said: "I think the scheme will be welcomed in the big, quoted company sector but ... it's just not going to work for unquoted companies. It's going to be difficult for them to comply with the inevitably detailed rules and to offer it across all their workforce."

Large companies were loud in their praise of the move. Lord Marshall, chairman of British Airways, said it would help speed plans to achieve 10 per cent ownership of the company by its employees. He said: "The Chancellor has come up with a highly progressive way to give an important boost to the work of raising this country's level of business competitiveness."

In contrast, Michael Jacobs, chairman of the shares schemes committee at Cisco, the City group for smaller quoted companies, doubted whether the Chancellor would be able to double the number of such schemes through his proposals, as he declared he wanted to last year. But overall Cisco welcomed the proposals.

"If you hold the shares for the qualifying period, you will pay no capital gains tax or income tax on the gain that you make on the shares. This goes well beyond tax relief on any previous employee share schemes," he said.

Mr Jacobs, who is also a partner in Nicholson Graham & Jones, a firm of City lawyers, added: "These schemes should be very attractive to smaller quoted companies."

Hugh Jory, partner at the Millfield Partnership, independent financial advisers, generally welcomed the proposals, and said his firm would seek to build them into client portfolios. But Mr Jory added: "It is also important to weigh the risks in such schemes. After all, the employee will be putting his entire investment into just one company's shares."

Along with New Labour, trades unions showed yesterday how far they had come in embracing popular capitalism. The Trades Union Congress (TUC) chief economist, Bill Callaghan, said the share plans were "an important step forward. While share ownership can help to increase employee financial involvement, it is vital that this is accompanied by genuine involvement of employees in the company's decision making processes".

The Iron & Steel Trades Confederation (ISTC) also welcomed the Chancellor's plans. Michael Leahy, general secretary, said: "We have already asked British Steel to examine a scheme which will reward employees with shares when they perform well."

Mr Brown's ambitious plans to expand share ownership face two big obstacles: the reluctance by smaller companies to embrace such schemes, and the tendency of employees to sell their shares as soon as the existing three-year minimum period expires.

At the moment more than 800 companies offer a profit-sharing scheme, covering a total of more than 1 million employees. Another 1,200 offer a savings-based shares scheme covering 1.25 million employees. All-employee share schemes are common among the biggest employers, but much less common for smaller and private companies.

Although all 30 companies which floated on the London Stock Exchange last year came up with some kind of employee share scheme, just half of them offered this to all employees.