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John Greenwood: Who will benefit from employee-owner contracts?

Love it or hate it, George Osborne’s planned shares for employee rights deal will certainly offer a whole host of new tax planning opportunities for IFAs working in the corporate space. But it is no overstatement to say the chancellor’s proposed ‘employee-owner’ contracts of employment are not without their complexities.

Under the plans, between £2,000 and £50,000 of shares can be given to employees in return for waiving their rights, and they will not be subject to capital gains tax, in addition to the existing employee share ownership deals available. It is hard to see those who are getting £2,000 worth of shares, actually needing the CGT exemption on top of their £10,600 allowance. But this will be attractive to those on close personal terms with managers.

Some accountants are suggesting these shares will be able to be given to an employee, and tax advantages retained, even if the employee renegotiates another deal at a later date that reinstates employment rights. Given that many small businesses are family-owned, the potential for manipulation of the rules seems extensive.

Some have taken the policy initiative, launched at the Conservative’s conference in Birmingham earlier this month, as just a bit of showboating for the party faithful. Given the policy would kill off workers’ rights built up over years of hard negotiations, the unions’ response so far has been muted.

The TUC says it is going to be ‘vigilant’. But given the Treasury’s clearly signaled intention to rush legislation through the house to get the new rules ready for use by April 2013, unions will need to raise their game if they are serious about stopping the policy. Osborne’s plan works in a way that means TUC members will not be affected at first. But they will when they change jobs.

The policy will certainly divide opinion if it does see the light of day. But it will surely only gain traction amongst SMEs, at least until it becomes perceived as normal.

The Treasury says existing employers will be able to offer their staff employee owner contracts if they want. But who would take them? I cannot imagine many IFAs advising clients to accept shares worth £2,000 or more, in return for losing all right to an unfair dismissal process and redundancy pay. Like a poor value defined benefit pension transfer offer, the cards are surely going to be stacked against the individual.

And what company with any public reputation to protect will want to go for such a plan? I can already see the newspaper article, with a photograph of the distraught former employee, share certificate for what was £2,000 worth of shares but is now half that value in one hand, dismissal letter in the other, standing outside their former employer’s head office.

What’s more, having two sets of employees – those with rights and those without – hardly works in the spirit of the human capital management strategies that bigger companies spend a lot of time and money looking to implement. It would also risks damaging the reputation of existing SAYE and SIP arrangements. Am I going to get the sack if I opt into these schemes?, employees will start asking themselves.

So that leaves existing SMEs, particularly start-ups. In this area the demand from employers is obvious. Employee-owner contracts could become very attractive to employers, particularly for employees at the top and the very bottom of the pay scale.

If these new rules do see the light of day then unfair dismissal and redundancy pay would become a thing of the past for many parts of the workforce.

Liquidity of shares in small and micro companies is another issue. But with today’s levels of unemployment, job-hunters are not going to give two hoots about whether they can actually sell their shares, or what the spread will be when they do. The £2,000 will be factored in as part of the overall reward package – and that will be that.

But amongst business owners and their close friends and family, employee-owner status looks like another opportunity for some creative tax planning.

John Greenwood is editor of Corporate Adviser

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