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John Greenwood: Plenty of pitfalls in employee shareholder plans

Employee shareholder blurs the line on what is a tax loophole

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Osborne’s Cones Hotline or the most divisive piece of employment law for a generation?

Whichever proves to be the case, advisers will need to know their way around the new tier of employment status the Government has labelled ‘employee shareholders’, better know to its critics as “shares for rights”.

Many people thought the Chancellor’s employee shareholder proposals, formerly known as employee-owner contracts, were so complex, divisive, cumbersome and expensive that they would never see the light of day.

Take-up will be minimal and the effect of the new freedom for employers will not grow the workforce said the overwhelming majority of the 209 organisations that replied to the Government’s consultation on the plan. 

But those who thought this policy would be quietly dropped, myself included, have been proven wrong.

The Growth and Infrastructure Bill, which contains the proposals, has now received royal assent, despite being kicked out twice by the House of Lords, with Lords Lawson and Gummer amongst a string of senior Tories critical of the plan.

Like it or not, what is being described as Osborne’s pet policy project is now on the statute book and we could see the first employee shareholder offers being made as early as September, although later in the autumn seems more likely.

Employee shareholders will be offered a minimum of £2,000 in shares for giving up the right to be unfairly dismissed. Shares given under an employee shareholder contract up to the value of £50,000 can be sold without attracting capital gains tax. The first £2,000 worth of shares are paid effectively free of NI and income tax.

The payoff for receiving these shares is that the employee shareholder loses right to be unfairly dismissed, except for any grounds that are considered automatically unfair. That means employers will not be able to get rid of employee shareholders if they become pregnant, on grounds of discrimination, for membership of a trade union or whistleblowing. But it does mean bosses can sack staff for minor breaches of conduct or if their job becomes redundant. It also means staff can be dropped without expensive redundancy payments.

So far no big companies have gone anywhere near the idea, and it is extremely unlikely any will, at least for a few years until public reaction to employee shareholder status can be properly gauged.

But that is not to say they won’t start introducing it for pockets of their workforce once SME owners have taken all the flak for doing so and the public have become resigned to the idea.

As we saw with the closure of final salary pension schemes, once a company with a big financial interest in introducing an unpalatable change takes the plunge, others are quick to follow.

No employee will be coerced into accepting employee owner status, but employers will be able to only offer jobs to those willing to accept employee owner status. In today’s labour market it is hard to see a jobseeker turning down employee shareholder status unless they have a very good offer somewhere else.

But arguably the biggest complexity relates to the valuation of the shares being paid over. With start-ups and early stage companies considered the main target area for use of the employee shareholder structure, there will be no readily available market for these shares, so an independent valuation will be needed.

If it turns out the valuation was wrong, the Government has accepted that someone who takes up employee shareholder status will be able to go to tribunal to argue that they didn’t actually receive £2,000 worth of shares and therefore never was, technically speaking, an employee shareholder.

The Government says it wants to stop the rules being abused as a tax loophole, but with no CGT on up to £50,000 of shares up for grabs, we can expect to have to figure out where the line between dubious and acceptable use of these contracts actually lies.

John Greenwood is editor of Corporate Adviser

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. This piece of nonsense amply demonstrates Osborn’s unsuitability for the post which he currently occupies.

    Let’s look at the nuts and bolts. Min value £2k. But how do you value the shares of a small close company? Let’s say that the owner/founder and family retain 75% shareholding. That leaves 25% for the staff. Assume 25 staff – then each gets 1%. That values the firm at £200k. So smaller firms won’t have much of a chance to participate (assuming they would want to)

    Why would you give shares to someone you may sack? What happens to the shares when you sack them? There is no market for the shares of a small company.Does the firm buy back the shares? If so it can be argued that a minority holding is worth less than par. The firm indeed may be worth less. The shares could be bought back by the firm and cancelled, thus making the percentage holding of the remaining shareholders greater. The buyback attracts tax relief.

    Alternatively the majority shareholder can decide to increase the share capital or issue different share classes and thus ‘strand’ the minority with even more worthless holdings.

    Far easier to either rotate workers so that they don’t qualify for these protections in the first place, employ contract workers or outsource. This is guess would mainly apply to SMEs; the big outfits can just shift their operations to more benign locations and avoids the whole thing. As many already have done. Just look at Dyson.

  2. What a MESS…. complete madness.

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