It was the year Maurice Saatchi was toppled in a dispute over share incentives, and the shadow chancellor informed the nation that the revenue lost by cancelling the proposed increase in the rate of VAT on fuel could be recouped by making gains on executive share options liable to income tax.Away from the headlines, 1994 saw a number of significant developments in employee share ownership law and practice.If executive share option schemes will be an inevitable casualty of a Labour general election victory, by contrast, qualifying employee share ownership trusts (ESOTs) have the egalitarian credentials to commend them to a Blair administration.

Unfortunately, this egalitarianism has deterred all but a handful of companies from taking advantage of the ESOT legislation since it was introduced by the Finance Act 1989.In the Finance Act 1994 the government sought to boost the popularity of ESOTs by relaxing the statutory rules in two ways.

Payments made by a company to an ESOT are tax-deductible, provided the trustees use the money to buy shares for distribution to employees.

The maximum distribution period has now been increased from seven years to 20 years (paras 6 and 7, sched 13 to the Finance Act 1994, amending s.69 and para 9, sched 5 to the Finance Act 1989).The other change relates to the appointment of the trustees of an ESOT.

Pre-Finance Act 1994, some employers may have been deterred from setting up ESOTs by the fact that a majority of the trustees had to be employees elected by a majority of the workforce.

Now, the employee representatives can be counterbalanced by an equal number of non-employee trustees, wi th the casting vote held by a professional (a solicitor or a member of another body approved by the Inland Revenue - the various accounting bodies have been approved) elected by all the other trustees (para 3, sched 13 to the Finance Act 1994, amending para 3, sched 5 to the Finance Act 1989).This new structure rejoices under the name 'paritarian'.

As an alternative to individuals, the trustee can be a company with the directors being appointed on the same paritarian basis.

Since this offers the comfort of limited liability, it is likely to be the most popular choice for future ESOTs.Government efforts in 1994 to popularise ESOTs did not end with these changes to the tax rules.

On 5 April, the economic secretary to the Treasury, Anthony Nelson MP, announced the intention to exempt ESOTs from the regulatory constraints imposed on 'collective investment schemes' by the Financial Services Act (FSA) 1986.Although the Act already contains an exclusion from the collective investment regime for certain employee trusts, application of the exclusion has to be judged on a case-by-case basis and is conditional upon the trustee being a subsidiary of the employer company.The Treasury believes that this uncertainty can be removed without prejudicing the protection of employee investors.

It is therefore proposed to bring the tax and FSA provisions for ESOTs into line, so that a trust which meets the tax requirements will automatically qualify for regulatory exemption.

It is understood that this change will be implemented by statutory instrument in the next few months.The Finance Act was followed by a statutory instrument which preserved immunity for employee share schemes from deduction of income tax under the PAYE system.The background to this was the device - particularly popular in recent years with banks and other City institutions - of paying staff bonuses in shares and other securities in order to avoid employers' national insurance contributions (NICs).

This had the incidental advantage of also avoiding PAYE, which applied only to cash payments.

The NIC loophole has gradually been closed, and s.127 of the Finance Act 1994 now provides that employment income in the form of shares or other 'tradeable assets' is also subject to PAYE.However, the NIC rules have preserved an exemption for employee share schemes and an equivalent dispensation from PAYE is given by para 3 of the Income Tax (Employments) (Notional Payments) Regulations 1994 (SI 94/1212).

This privileged PAYE and (especially) NIC status is a significant continuing advantage of share schemes over cash-based employee incentives.The 1994 budget was a virtual non-event as far as employee share ownership was concerned.

The only relevant item concerned the savings contracts entered into by employees who participate in an approved savings-related share option scheme.

All such contracts are based on a model form of prospectus which is updated from time to time by the Department for National Savings (DNS).

Contracts have until now been available from the department, as well as from UK banks and building societies.The DNS's role as prospectus draftsman is now to be assumed by the Treasury and the DNS will cease to act as a savings 'carrier'.

Individual institutions will need specific Treasury authority to do so, and those eligible are to be extended to include European banks which can accept deposits in the UK.So far, all the tax changes mentioned have been to the advantage of the taxpayer.

But an Inland Revenue press release in March was potentially bad news for globetrotti ng executives with share options.There has never been any doubt that the strict legal position is that an executive granted an option when a UK resident, triggers an income tax liability under s.135 of the Taxes Act 1988 when he or she exercises that option, even if, by then, he or she is living abroad.

However, in practice the Inland Revenue has tended to take a much more lenient view, not pursuing a non-resident for tax on his or her option unless the main motive for emigrating was to avoid that liability.Over recent years, this concession had been gradually whittled away and it has now been completely withdrawn for options exercised on or after 6 April 1994.

A similar concession for employees whose earnings qualify for the 'foreign earnings deduction' has also been terminated.This Revenue volte-face makes it crucial for expatriates to take up their options under an 'approved' share option scheme.

Approved status will provide a shelter from the income tax liability on exercise, and when the shares are sold the executive will be able to rely upon the blanket capital gains tax exemption for non-residents.Travelling the short distance from Bush House, the bastion of the Revenue's employee share scheme division, to the Strand, the High Court gave further support to the Revenue's conservative view on amendments to share schemes.IRC v Reed International plc [1994] STC 396 - only the third case on the approved scheme legislation - arose out of the merger of UK publisher, Reed, with its Dutch counterpart, Elsevier.

The merger was implemented by the creation of a 50:50 holding company to which the two partners transferred their operating subsidiaries.

As a result, employees of Reed subsidiaries became employed by a company no longer under Reed's control.This posed a problem for those employees who were participants in Reed's approved share option schemes.

The rules of those schemes provided that employees of a company which left the Reed group could not retain their options.

Reed applied to amend the schemes so as to allow options to be retained if the employing company became jointly owned by Reed and another.Strictly speaking, joint venture companies are excluded from approved 'group' schemes.

However, by long-standing concession (ESC B27) the Revenue does allow such companies to participate, provided certain conditions are satisfied.

Had Reed's amendments been designed solely to allow for the grant of future options to employees of 50:50 companies then ESC B27 would presumably have applied and the matter would never have reached the court.But what stuck in the Revenue's gullet was that Reed also wanted to preserve existing options which would otherwise be triggered by the merger.

This offended Bush House's deeply held objections to 'retrospective' scheme amendments.Taking the Revenue's side of the argument, and following the decision in IRC v Eurocopy plc [1991] STC 707 (see [1992] Gazette, 4 March, 25), Mr Justice Blackburne decided that the proposed changes would amount to the grant of new rights to existing option-holders.

As such, the new grants would need to comply with all the relevant statutory conditions.

Since this was not possible - the market value of the shares was considerably in excess of the option price - Reed's application was rejected.As the year drew to a close, the Revenue was on the losing side in another case involving an approved share option scheme.

Mr Eve was employed by a subsidiary of Hill Samuel Group and held an option under HSG's savings-related share option scheme.

HSG subsequently sold off Mr Eve's employing company and his option consequently lapsed.

Several years later, to his complete surprise, Mr Eve received a cheque for £10,000 from HSG, as ex gratia recognition of his option loss.In Wilcock v Eve [1995] STC 18 Mr Justice Carnwarth ruled that Mr Eve's bonanza was not taxable.

Revenue arguments that it was either an emolument of his employment or a benefit in kind were swept aside.

The loss of the option was not 'intimately connected with the employment' but was to be treated 'as something distinct'.Though no doubt highly gratifying for Mr Eve, his victory is unlikely to assist many other taxpayers.

It will not be relevant where an option-holder is paid to surrender his or her rights - income tax will be charged under s.135 of the Taxes Act.

So the only possible application will be where the employee has no remaining rights and the employer is therefore not obliged to make a payment but nevertheless chooses to do so - a relatively rare occurrence.Finally, with impeccable timing, the Revenue produced the ideal stocking filler for your favourite share scheme lawyer.

In line with the government's new code of practice on access to official information, the manual which is issued to local tax inspectors guiding them on how to handle employee share scheme issues was put on sale to the public.

Much of it is pretty mundane, but there are one or two nuggets for those prepared to dig.

A mere snip at just £4!1995