The GAAR Advisory Panel has published an opinion on a number of schemes aiming at extraction of cash/value from a company by its directors/shareholders using Employee Shareholder shares and they conclude that the planning is unreasonable and therefore inconsistent with government tax policy.

The schemes exploited a loophole within Employee Shareholder (ES) share regime which allowed directors' shares to be converted into ES shares and capital extracted, all to the tax advantage of directors and shareholders.

The opinion provides detail of the various steps undertaken by scheme users. The panel concluded that:

Each of the particular circumstances set out in section 207(2)(a), (b) and (c) FA 2013 and section 207(4)(a) FA 2013 point towards both the entering into and the carrying out of the scheme as not amounting to a reasonable course of action in relation to the relevant income tax and capital gains tax provisions.

a) The substantive results of the steps taken are not consistent with the principles and policy objectives on which the underlying ES Shares Legislation is based.

b) The means of achieving the intended result relies on an abnormal and contrived net asset value hurdle built into the rights of the ES C Shares so that effectively all current value can be passed out of the Taxpayers’ original shareholding into the ES C Shares held by those same Taxpayers.

c) The arrangements exploit a shortcoming in the legislation as the particular circumstances of overlapping existing shareholders and holders of new ES Shares had not been contemplated by the drafter. If it had been contemplated anti value-shifting provisions would have been included to prevent exploitation.

d) The overall tax outcome is that the proceeds of sale of the ES C Shares (a substantial proportion of those proceeds representing value “owned” by the Taxpayers before the ES C Shares were issued, and indeed before the Taxpayers made their valuation request) are intended to be taxed in a different way to the way in which comparable transaction share repurchases are ordinarily taxed.

Panel's Opinion

The entering into of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions; and the carrying out of the tax arrangements is not a reasonable course of action in relation to the relevant tax provisions.


The ES shareholder scheme was closed to new shareholders in 2016: it was found to be too generous a tax break. The schemes reviewed by the GAAR panel sought to exploit weaknesses in the legislation.

External links

GAAR Advisory Panel