Insight - Licence to bill.

(From Financial Director)

Byline: Anthony Harrington.

With a truly astonishing lack of consultation, the Inland Revenue revealed on 16 April in its Finance Bill that it wants to move immediately to a US-style treatment of employee shareholdings. This involves employee shareholders, including management, making an early election - within 14 days according to the bill - as to whether to be treated inside the provisions of the bill or outside it.

Electing to be outside the bill could trigger an immediate PAYE 40% tax charge, plus NI on any difference in value between the market value of the shares and what the employee paid for them. Being inside the bill could trigger tax at 40% any time any condition attached to the shares is changed, even if no actual sale of the shares takes place.

The move has far-reaching implications for the way management buyout and buy-in deals are structured in future, and has been attacked by many corporate finance specialists as a serious stumbling block to MBO and MBI deals. John Hodgson, a tax partner at Grant Thornton, is currently advising on an MBO that is nearing conclusion. He believes the bill creates uncertainty for management and that it is standing in the way of completion.

David Tuck, a tax partner at KPMG, agrees. "We are supposed to be heading for tax simplification and now have legislation thrust upon us that leaves tax specialists struggling to understand how this is going to work. We have deals in process right now and simply do not know how this is supposed to play between now and July when the draft legislation becomes law. The problem is the lack of certainty in knowing if the legislation bites in specific circumstances. It is incredibly unhelpful for MBO activity at this crucial juncture in the market," he says.

The shift to a US-style system is not made explicit in the bill. Nowhere in the bill does the Inland Revenue come right out and say, 'We think the US system is a great idea, so we're going to throw caution to the wind and adopt it here.' Instead, to the surprise of the profession, the Inland Revenue has simply slotted a 76-page section (Schedule 22) into the bill that is incredibly dense in changes and refinements to established practice.