12 October 2012
The governments new proposals for owner-employee share schemes seek to encourage employee ownership of companies, whilst partially reducing the burden of employment laws. There will be a number of commercial, legal and tax considerations for companies and their employees to consider.
The government proposes to introduce a new owner-employee share scheme that will allow companies to offer shares worth £2,000 to £50,000 to employees who forgo certain employment rights. Companies of any size will be able to use the scheme and will be to choose whether to only off this new type of contract to new employees. Whether an existing employee wants to covert to an owner-employee will be optional.
The shares given to owner-employees are to be exempt from Capital Gains Tax (“CGT”). In exchange for the shares, the owner-employee will give up various rights, including those on unfair dismissal, redundancy, flexible working and time off for training. Owner-employees who receive shares under the scheme will remain eligible for other existing employee share schemes.
The government is now consulting on the detail of the scheme and is due to report back by the end of October 2012. The new legislation is to be enacted later this year so that it is effective from April 2013.
It is fair to say that initial reactions to the government’s proposals have been mixed. Many were surprised that the proposals appear to have been announced without any prior consultation on the potential details of the scheme. Many consider the proposals to be an interesting idea, but there have been a number of questions and concerns raised regarding commercial, legal and tax considerations. Examples of some of the questions and concerns are as follows.
- The complexity of the legal and tax rules may be off-putting to many small and medium sized businesses; whom the scheme is primarily aimed at.
- The decision for employees on whether to exchange employment rights for shares will be complex. Employee shares schemes in small and medium sized companies are usually offered to senior employees who have a better understanding of the business in order to make a decision.
- Owner-employees will find it difficult to predict future gains on shares which are highly illiquid, high risk, shares in unquoted companies. There will be no certainty on whether shares will ever be saleable. Any valuations will be highly uncertain. How appealing will this be to the majority of employees versus retaining all their employment rights?
- Which professional advisers will advise on what route employers or employees should take? At what point is there a danger of professional advisers straying into investment advice?
- The most obvious potential beneficiary of the scheme will be small and medium sized high growth companies and their current or prospective employees. Will such company’s be interested in offering shares to different types of employees? Traditionally employee ownership of shares has been the domain of the senior employees or key talent whom they wish to retain and incentivise.
- Research suggests that employment laws are not a primary reason for employers not taking on new employees. Given this is the case will owner-employees be something that employers will want to consider?
- What is the real value of the CGT exemption for owner-employees? The value of this is perhaps questionable given that individuals already have the annual CGT exemption (currently £10,600) available to them each year and this is never used by the vast majority.
- The key issue with any gift of shares to employees of a company is that the difference between the value of those shares and any amount paid for them (if any) is subject to Income Tax and National Insurance Contributions (“NICs”). There was no mention of this in the government press release. The Treasury has since confirmed that the transfer of shares to the owner-employee will be subject to Income Tax and NICs. Unless the owner-employees tax liability is removed or deferred in some way, this may be a deterrent for many.
- From both the employer and owner-employee point of view, great thought needs to be given on how leavers are dealt with. The government has said that if an owner-employee leaves, the company will not be able to simply take back the shares, but will be able to buy them back at a reasonable price. Companies won’t want to be required to buy back shares, but will want the option, and employees will want some certainty they can realise value.
- It has been suggested that the removal of the right to bring an unfair dismissal claim could breach European Laws. To rectify this additional employment law could be needed, adding further complexity.
- Will the government’s policy of linking shares with a CGT exemption to the loss of employment rights meet opposition from European Courts?
The above is just a selection of questions and concerns. Ultimately whether the scheme will be attractive for small and medium sized companies will be dependent on the final legislation, the company’s circumstances and the practical, legal and tax considerations.
Individually, proposals encouraging employee ownership of companies and legislation encouraging companies to take on employees, are welcomed. Whether linking the two in the way proposed is the right way forward is an important question. If the scheme is to be effective from April 2013, then the consultation process and drafting of legislation will have to be completed quickly. Consultation is now underway and more announcements are expected soon. The final detail will determine the attractiveness of the scheme to small and medium sized companies and their employees.
For more information on the government owner-employee share scheme proposals and for advice regarding employee share schemes generally, please contact us on 01788 539000.
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