The Department for Business Innovation and Skills (BIS) has launched a consultation on implementing employee owner status. This follows an announcement by the Chancellor at the Conservative party conference on a new scheme to encourage employee share ownership.

The new consultation explores the radical idea that potential employee-owners will be willing to exchange some of their UK employment rights for rights of ownership in the form of shares in the business they work for, any gains on which will be exempt from capital gains tax. 

Key features: 

  • Applies to companies of any size, but it is principally intended for fast growing small and medium sized companies who want to create a flexible workforce.
  • Employees will be given between £2,000 and £50,000 of shares that are exempt from capital gains tax. 
  • Shares may be of any type and may carry a range of rights, including rights to dividends.
  • Share values and leaver rights will be fixed to ensure that employees are not forced to dispose at an undervalue.
  • Employee owners will be a new type of worker, they will give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training, and will be required provide 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual eight.
  • Employee owner status will be 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 employee-owners will continue to have the option of inserting more generous employment conditions into the employment contract if they want to.
  • Legislation is expected to be ready for scrutiny by the end of November 2012 so that companies can use the new type of contract from April 2013. 

Tax planning

Employees will give up some of their employment rights in exchange for between £2,000 and £50,000 shares in their employer’s company. 

  1. The company has to be worth more than £2,000 at the time of the award so this measure will not work with start-up companies.
  2. Employees will be subject to income tax on their share award, they will only be subject to National Insurance if their shares are readily convertible assets.
  3. If the employer pays the employee’s tax, there will be additional National Insurance payable on the amount of tax paid.
  4. There is not limit on the type of shares that can be offered, for example, they can be restricted, subject to forfeiture or entitled to  fixed dividends or not entitled to dividends.
  5. The shares can be disposed of tax free, this saves 18%/28% in CGT.

Potential problem areas 

  • How to avoid mis-selling of potential benefits by an employer to a minority shareholder.
  • Increased costs for employers.
  • There may not be any guarantee of a company sale.
  • Trading arrangements will make shares readily convertible assets.
  • It is generally expensive for companies to amend their Articles and create shareholder agreements.
  • The rules in Part 7 ITEPA 2003 – employment related securities are difficult for employers to understand without assistance.
  • Valuation of different types of shares with different types of restriction is never straightforward.
  • Employers may prefer to retain full rights and participate in an unapproved share scheme or EMI share option scheme.