RE: EOnation: UK Tax Policy and Unanticipated Consequences

[Shann Turnbull <sturnbull@mba1963.hbs.edu>]

Follow up on COG policy discussion.  You can sign up and contribute your 
thoughts directly at http://cog.kent.edu/.  They would be interested in the 
Australian situation.  I have contributed the response by Geoff Price to 
the their discussion group.

Shann

At 06:39 PM 20/4/2001, Langley, Aidan (UK) wrote:
>      Dear Jacquelyn
>
>      I didn't mean to suggest that the AESOP won't encourage employee
>      shareholding; it certainly will do that - but only for the five-year
>      holding period.
>
>      Once that expires, the only reason to keep the shares in the AESOP,
>      rather than spend the cash or diversify the investment, is the capital
>      gains tax relief. And that is only useful to a small minority of
>      employees.
>
>      The reason for this is that there is an annual exemption for the first
>      GBP 7,500 of realised gains on investments, or GBP 15,000 for a
>      married couple. In US dollar terms this is around $12,500 or $25,000.
>      You don't pay the capital gains tax unless your gains exceed this
>      exemption amount.
>
>      Only about 5% of the UK population actually have investment portfolios
>      which are big enough to make annual realised gains of that magnitude,
>      so only about 5% ever pay capital gains tax.
>
>I agree your point that employees will not retain their shares unless
>compelled
>to do so. The economic pressures on them to sell or diversify are very
>strong.
>
>As to whether Government foresaw this, I think Government is aware that it
>only
>has a limited number of tools with which to affect people's behaviour, and
>the
>CGT relief was the only tool available to encourage shareholding beyond the
>five-year period.
>
>Government could, I suppose have lengthened the compulsory holding period
>to,
>say, seven or ten years. But Government has to rely on employers to
>establish
>AESOPs and introduce them. Employees would have regarded a seven-year period
>as
>too long, so employers would have been less inclined to introduce AESOPs.
>
>Financial education is indeed recognised as important, but the actual use of
>
>these in practice is patchy. This is due to cost constraints on HR
>departments
>in employers. Certainly, whenever I am advising a client on a new AESOP I
>will
>stress the importance of financial education, but many clients will not have
>a
>budget to pay for the additional consulting work required. On the other
>hand,
>there are shining examples of companies which are willing to invest in this
>area, and, yes, those tend to be high-performing companies. BP Amoco, a
>company
>I know well, is an example.
>
>We have an organisation here called ProShare (http://www.proshare.org.uk)
>which
>is very good at providing financial education services to employees.
>
>On a separate point, has this group discussed the practical difficulties of
>operating employee share plans in unquoted companies? If so, could you
>direct me
>to the thread of correspondence and I might want to add some thoughts
>
>
>
>______________________________ Reply Separator
>_________________________________
>Subject: EOnation: UK Tax Policy and Unanticipated Consequences
>Author:  "Jacquelyn Yates" <SMTP:Yates@salem.kent.edu> at UK
>Date:    20/04/2001 04:01
>
>
>Dear Aidan, I would not have realized that the AESOP policy wouldn't
>encourage
>employee shareholding -- it sounds like such a good deal.  I am wondering
>how it
>is that most employees wouldn't be liable for some capital gains tax. What's
>the
>reason for that?  Is capital gains tax in the UK progressively structured
>and
>proportional to income?
>
>Your point shows that well-intentioned fiscal incentives can be perverse. Do
>you
>think the Government had any idea of this problem when they adopted the new
>policy?
>
>Your response pushed me further in thinking that if government policy
>doesn't
>compel employees to hold their shares for a long period, they probably won't
>do
>so.
>
>I guess that shareholding is a also new experience for the average employee,
>and
>that education is needed before they can see how the benefits can work.
>Most
>employees don't understand the management of enterprises,  and they don't
>have
>enough information to connect their activities in the cubicle or on the shop
>
>floor with improvement in stock value.  Nor do they have the skills needed
>to
>convert their individual knowledge of how to improve the enterprise into a
>common plan of action.
>
>U.S. research shows that employee-owned companies outperform their
>traditional
>counterparts only when there is employee participation in firm management
>and
>governance.  And participation is the best kind of education -- experiential
>
>education.
>
>What kinds of employee education and training are happening in the AESOP
>companies?
>
>
>
>
>--
>Jacquelyn Yates, Ph.D.
>Political Science
>Kent State University - Salem
>2491 S.R. 45 South
>Salem, OH 44460
>
>yates@mail.salem.kent.edu
>FAX  330-332-9256
>Tel. 330-337-4282
>
>
>
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Shann Turnbull  Ph.D.
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