In November last year, 3.7 million employees in the UK were signed up to a profit-related pay scheme. By April this year, the number had risen to 4.1 million, this despite the Budget announcement in November that the tax benefits would be cut from 1998 and phased out completely in 2000. The fact that nearly half a million employees had entered into PRP in the five months after the announcement of its imminent end is reminiscent of the rush to claim joint mortgage relief before the rules changed, the fuel which so stoked the housing market in 1988. No wonder that at the time of the Budget announcement, Labour was so swift to criticise the Tories for not clamping down on new company schemes immediately.
Yet while newcomers enter into the arrangement with their eyes open, old hands are faced with a problem - one to which few firms have as yet found a solution. Admittedly when the tax relief was first introduced by Nigel Lawson in 1987, it was viewed as generous to a fault, seen by many as a tax loophole rather than as a serious attempt to promote the enterprise culture. Yet whatever companies' reasons for adopting the scheme, the phasing out of the tax relief will leave either employers or their staff facing significant shortfalls. In his article on page 48, PRP plus turns to minus, Daniel Butler explores the various ways in which companies may tackle the problem. Where the tax benefit was passed onto employees directly, an argument can easily be made that the company is under no particular obligation to make good changes in the prevailing national tax regime. Where, however, companies absorbed some or all of the benefit in what are know as salary sacrifice schemes - that is, where companies used PRP instead, say, of giving staff a pay rise - the obligation is clear. Few companies may yet have finalised their PRP replacement policies, but in the case of salary sacrifice, paying up is the only decent option.