Jointly Owned Equity (JOE) arrangements

Jointly Owned Equity (JOE) arrangements

We are pleased to present an article by Daniel Harris , Director of Human Capital at Ernst & Young in Manchester, who has been working closely with Volaw’s Employee Benefits Group, in which he looks at a type of tax-efficient employee incentivisation that is proving increasingly popular in the current economic climate.

The green shoots of recovery seem to be appearing much more slowly than many economists anticipated as the economic outlook until the end of 2009 seems to be looking as unpredictable as the first half. In such an environment many companies are now considering the most appropriate form of incentivisation for their key people. The situation has been made even more complex by the recent increases in income tax and National Insurance contributions (“NIC”) summarised below which have focused many executives on delivering reward in a tax efficient manner.

In summary the proposed tax changes are:

  • A new top rate of income tax of 50% for earnings over £150,000.
  • The removal of personal allowances for those earning over £112,950 (causing an effective rate of 60% on some earnings).
  • Restriction of the tax relief for pension contributions.

There are a few arrangements available which can help companies achieve their commercial objectives whilst minimising the tax payable. However, one of the most topical of these arrangements is the Jointly Owned Equity (“JOE”) arrangement. JOE is a tax-efficient mechanism for rewarding and motivating employees and for aligning employees’ interests with those of shareholders.

It largely replicates a market value share option, with the employee being conditionally entitled to the growth in value of the shares following the date of the award. This growth in value should be taxed as capital at 18%. It is not an HMRC approved arrangement, and there is, therefore, greater flexibility as to the size of award and the terms on which it is made.

Operation of the plan

JOE operates by, in effect, splitting the ordinary shares in a company into two separate interests to be held jointly by an employee benefit trust (“EBT”), typically an overseas EBT, and the employee. The EBT acquires an interest in the intrinsic value of the shares. The employee acquires an interest in the future growth in value (see diagram).

The employee is generally required to satisfy certain performance conditions before their interest in the shares can be sold. These performance conditions can be the simple requirement to remain employed for a specified period or can be more sophisticated taking into account the performance of the company and/ or the employee over the period. When any performance targets have been satisfied, the shares can be sold and the employee will realise a capital gain at 18% rather than the potential 50% plus employees’ and employers’ NIC. The arrangement can also be structured to be non-dilutive if required.