Employee Share Ownership – Opportunities for Sharing in Success

Chancellor of the Exchequer, George Osborne MP, announces plans for new kind of employment contract, employee-owner, creating a “flexible workforce” primarily for SMEs.

Growing the economy is the Government’s most pressing priority, with the need to encourage more responsible and diverse ways of running a business being high on the agenda. The relationship between a business and its employees is key to ensuring the business works to its full potential; and a worker with a financial and personal stake in a company is likely to take more responsibility for its success.

With this in mind, the Chancellor has announced plans to bring onto the Statute Book a new kind of employment contract called employee-owners. Employees will soon to be able to sacrifice some of their key employment rights in exchange for shares in the employing company. The award would give employees between £2,000 and £50,000 of shares in the company, with no Capital Gains Tax on the disposal of these shares.

Whilst the employee-owner provisions are available to businesses of all sizes, for both new and existing employees, it is envisaged that smaller entrepreneurial companies are likely to find the  scheme most attractive, as they seek to build a flexible workforce.

The key rights employee-owners would part with, are those relating to unfair dismissal, redundancy, flexible working and time off for training. There would also be minor changes to notice periods surrounding maternity leave.

Corporate Tax at Beavis Morgan, explains: “It would currently appear that employing companies will have the option to insert some of these forfeited rights back into the employment contracts, but it remains to be seen how this will happen in practice, as there is clearly scope for abuse of process here.

“From a planning perspective it may be possible to achieve a situation in which employees of established companies could get free shares without any material changes to their contracts. But, on the flip side, it could also mean that new employees of start-up companies are required to waive a significant proportion of their employment rights in exchange for a fairly nominal value of shares, which would be extremely difficult to later sell.”

Paul goes on to explain that the Government’s goal of an Entrepreneurial Britain does not seem to be well served by either of these two extremes, but it is the take up in the middle ground that will ultimately determine the success of such a scheme.

“The Legislation will need to be detailed and robust as there are many tax planners, myself included, already licking their lips at the prospect of what could be achieved from a tax mitigation perspective. I suspect that the days of the employee-owner contract would be limited if this plan is hijacked by the tax planners.”

An alternative, which is unaffected by the new plans, is to continue to use Enterprise Management Incentives (EMI) which allow employees to retain their employment rights and benefit if the company grows, but also to pay tax at a rate as low as 10% on the disposal of the shares.

EMI options can be granted over up to £250,000 of shares per employee. This upper limit is calculated against the market value at the date that the options are granted. EMI is only available to small and medium sized companies and has been specifically designed with entrepreneurial companies in mind.

Paul concludes: “With growing companies, EMI schemes are advantageous for all concerned because the amount of tax relief the company would receive when the employee exercises their options would be markedly higher, as the shares would be of higher value when the employee takes ownership of them. Employees also benefit from a potentially significant uplift in value without an initial capital outlay”.

The Treasury has confirmed that it is intended that the new employee-owner contract and EMI schemes can be used in parallel.

It is intended that the new employee-owner contract can be used from April 2013 and legislation to bring in the contract will be announced later this year.

For more information about owner-employee contracts and Enterprise Management Incentives, contact your usual Beavis Morgan Partner.