A special type of employee, 'the employee shareholder', was given special tax reliefs in 2013. These were removed from 2016. What relief was available? How did it work?

A guide for subscribers.

At a glance

A special type of employee was given special tax reliefs. This did not last long and tax benefits to new employees were removed from 2016.

  • A new type of employee, 'the employee shareholder' was created by the 2013 Growth and Infrastructure Act (GIA 2013). 
  • This inserts the definition and qualifying conditions for an employee shareholder into the Employment Rights Act 1996.
  • New beneficial tax provisions for employee shareholders were added by Schedule 55 Finance Act 2013.
  • The government decided that the measures were too generous and largely benefitting private equity investors.
  • In his Autumn Statement 2016, the Chancellor announced the removal of tax reliefs for individuals entering into Employee Shareholder Status (ESS) agreements on or after 1 December 2016.

Removal of the relief

Legislation was introduced in Finance Act 2017 to remove:

  • The Income Tax relief on the first £2,000 of ESS shares.
  • The Capital Gains Tax (CGT) exemption on ESS shares.
  • Provisions that prevent an employee from being taxed on a distribution when a company buys back ESS shares.

The following are not affected:

  • Shares received under agreements made before 1 December 2016.
  • Corporation Tax reliefs for the employer company.
  • The tax-free status of independent legal advice received by an employee.

The 2016 changes remove the majority of the tax benefits associated with ESS but did not close the scheme down completely. The Government has however said that it intends to legislation to close ESS to new entrants as soon as possible.

At a glance

The consequences of being an Employee Shareholder (ES) are as follows:

  • Employee owners are a new type of worker in terms of employment rights. 
  • The employee gives up certain employment rights in return for being offered shares in their employer company.
  • An employee shareholder retains the following rights:
    • Statutory sick pay.
    • Statutory maternity, paternity and adoption leave and pay.
    • Unfair dismissal rights where they are classed as automatically unfair reasons e.g. where dismissal is based on discriminatory grounds and in relation to health and safety.
    • Minimum notice periods if their employment will be ending (e.g. if an employer is dismissing them).
    • Time off for emergencies.
    • Collective redundancy consultation.
    • Transfer of Undertakings Protection of Employment (TUPE).
    • National Minimum Wage.
    • Not to have unlawful deductions from wages.
    • Paid annual leave.
    • Rest breaks.
    • The right not to be treated less favourably for working part-time or fixed term.
    • Not to be discriminated against.
  • An employee shareholder loses the following rights:
    • Unfair dismissal rights (apart from the automatically unfair reasons, where dismissal is based on discriminatory grounds and in relation to health and safety).
    • Rights to statutory redundancy pay.
    • The statutory right to request flexible working except in the two-week period after a return from parental leave.
    • Certain statutory rights to request time off to train.
    • In addition, an employee shareholder will have to give 16 weeks’ notice to their employer if they intend to return early from maternity, additional paternity or adoption leave.
  • An employer can choose to offer contractual rights that are more generous than those provided for in statute.

How to create an Employee Shareholder Share (ESS) scheme

  • An employer makes an award of shares to an ES with a market value of at least £2,000.
  • The shares are issued fully paid by the employer. The employee is not required to pay for the shares.
  • The first £2,000 of ES share awarded to an employee will be free of Income Tax. If the value of an ES share award is in excess of £2,000, the amount in excess of £2,000 is subject to Income Tax.
  • Awards of up to £50,000 of ES shares will be exempt from Capital Gains Tax (CGT) on the disposal of qualifying shares acquired as an ES. For ES agreements entered into on or after 17 March 2016, there is a limit to CGT relief: only gains of up to £100,000 will be exempt from CGT.
  • These Income Tax and CGT reliefs will no longer be available for ES agreements entered into on or after 1 December 2016.

Employment considerations

  • The employer must provide a statement of particulars of the status of ES and the rights which attach to their shares.
  • It must pay for third-party (independent) legal advice for the employee, this is followed by a seven-day cooling-off period before an employee is able to give up their rights to take advantage of the new share scheme.
  • Shares may be of any type and may carry a range of rights, including rights to dividends as well as any number of restrictions.
  • Employee owner status is optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires.
  • Companies recruiting ES will continue to have the option of inserting more generous employment conditions into the employment contract if they want to. 
  • Companies of any size may operate this scheme, but it is principally intended for fast-growing small and medium-sized companies who want to create a flexible workforce.
  • Some employers may decide to ignore this scheme, but it may also be used in combination with other schemes, for example, an EMI share option scheme. This creates a flexible arrangement for companies who do not wish to give up control to employees whilst also providing a valuable incentive.

The new measure was introduced on 1 September 2013.

Companies Act 2006 changes

The Companies Act has also changed to allow employer companies to buy-back their shares from employees. Key changes to the share buy-back rules are that:

  • Companies may hold their own shares in treasury (instead of having to cancel them).
  • Shares may be purchased by instalments.