Despite the exceptionally negative reaction from media commentators, politicians and employment lawyers alike, the Government is pressing ahead
with its “employee shareholder” proposals, which will enable employers to give shares to an employee in return for the employee giving up some of their key employment rights. In this Update we look at the proposals (now included in Clause 27 in the Growth and Infrastructure Bill 2012 – 2013 currently going through Parliament (Note 1)), and identify some of the issues that are raising concern.
1. An employee can be given shares in the employing company with a value of at least £2,000 (Note 2). Any gains on the first £50,000 worth of shares will be free of capital gains tax (CGT).
2. In return for the shares, the employee shareholder agrees under the terms of an employee shareholder agreement:
• to give up their unfair dismissal rights (except where automatically unfair, eg whistleblowing, or where the dismissal relates to discrimination)
• to give up their right to statutory redundancy pay
• to accept reduced rights to request flexible working and time to train
• to give 16 weeks’ notice when returning early from maternity, paternity or adoption leave.
3. Companies may require new – but not existing – employees to become employee shareholders as a condition of joining.
4. All companies (irrespective of size) can engage employee shareholders.
5. Corporation tax relief is available for the employee shareholder shares.
6. The employee shareholder shares cannot be used in relation to other employee share plans or an Enterprise Incentive Scheme, although the employee shareholder can still participate in such schemes.
1. Given that UK taxpayers have a CGT allowance (currently £10,600), as well as the right to transfer shares to a spouse or civil partner without tax consequences, the CGT exemption for the employee shares will clearly only come into play for larger allocations of employee shares (or, for smaller employee shareholdings, where the increase in the value of the shares is considerable).
2. Employee shareholders may be liable to pay income tax (and possibly NICs) on the value of the shares, although the Government is currently looking at this issue.
3. It is not clear whether the employer will need to pay employer NICs (currently at 13.8%) on the value of the employee shares when issued.
4. The employer may incur potentially significant valuation costs, both on the issue of the initial shares (if only to ensure that the £2,000 threshold has been reached), and when a leaving employee shareholder is required to transfer back their shares.
5. Companies will need to amend their articles of association, either to create a new class of shares for employee shareholders, or to vary the terms of their existing shares so that employee shareholder shares are transferred back to the employer at the end of the employment, again incurring costs.
6. It is not clear what happens following a TUPE transfer, where the employee shareholder is required to sell their shares back to their employer on the transfer of the business. Specifically, does the employee shareholder then acquire full employment rights? Does the new employer have to provide equivalent, replacement shares?
The current proposals are likely to be of most interest to senior executives, who are more likely to be able to fund the initial tax costs and are perhaps less concerned with giving up employment rights. But as a mechanism for giving start-ups and SMEs the confidence to recruit staff with reduced risk of ending up in an Employment Tribunal, the proposals may benefit from a bit more thought….
(2) the value is the unrestricted market value at the time of issue, as determined in accordance with the Taxation of Chargeable Gains Act 1992