Private equity house exploits new rules

A new government scheme aimed at boosting small business start-ups by allowing them to offer staff shares in exchange for giving up certain employment rights is allegedly being used to cut the tax bills for senior executives in the private equity industry report Harris & Co chartered accountants Northampton, the specialist small business accountant.

Long established dried fruit supplier Whitworths was sold last week by one private equity company, European Capital, to another, Equistone. As part of the £90m deal, eight managers are each being offered equity stakes worth up to £50,000 under the ‘employee shareholder’ scheme, according to the Financial Times.

Shares allocated under the scheme, which came into operation at the beginning of this month, are exempt from capital gains tax on re-sale. The initiative, which was originally announced at last year’s Conservative party conference, was described by the Department for Business, Innovation and Skills (BIS) as ‘a targeted measure that will appeal mainly to innovative new start-up businesses which are keen to grow and share ownership’.

However, the employee shareholder scheme was heavily criticised as it passed into legislation, with Labour’s shadow business secretary Chuka Umunna describing it as ‘a ridiculous policy that had the support of very few people indeed’. According to BIS, just six companies requested information in the three months prior to its launch, although initial estimates suggested up to 6,000 could be interested.

Despite the government’s insistence that the scheme is targeted at new businesses which want to find ways to incentivise employees without impacting cashflow, employment lawyers warned that other businesses where remuneration is closely linked to growth in the equity value were most likely to benefit, and said that the new regime is likely to be particularly attractive to the private equity and venture capital industries and owner-managed businesses.

In the case reported in the Financial Times, Equistone denied tax avoidance and said it would use the scheme again. A spokesman told the paper ‘It is about giving management an incentive to grow the business,’ and stressed that no other employees were being asked to give up their rights.