The new scheme for ‘Employee Shareholders’ came into effect on 1 September.
The scheme enables employees to receive shares in exchange for giving up certain employment rights.
What rights?
The rights to be given up by an employee shareholder are: protection from unfair dismissal, the right to redundancy pay, flexible working, and time off for training; and they will be required to give 16 weeks’ notice of their return date from maternity leave.
Tax breaks for the employee
In exchange, they can be given between £2,000 and £50,000 worth of shares in their employing company. They will be charged to tax and NIC on the value given to them, except for the first £2,000 which is exempt.
Any gain arising on the shares will be exempt from CGT.
Practicalities
Before becoming an employee shareholder, the employee must be given written details of the rights he will be giving up, together with details of the rights and restrictions attaching to the shares. The employer must pay for independent legal advice for the employee, and there is a 7 day ‘cooling off period’ before the employee can sign up to become an employee shareholder.
Existing employees cannot be forced to become employee shareholders, but employers can if they wish only offer work to new employees if they agree to become an employee shareholder.
There are virtually no rules about the type of shares to be offered or the restrictions attaching to them, but if these terms include a requirement to sell the shares back if the employee leaves, then the employer is required to buy them back at a reasonable price – being their market value when awarded, with the value based on the assumption that the shares had no restrictions attaching to them.
In some circumstances, if a company buys back its shares, the amount paid is treated like a dividend and taxed as income, but in the case of employee shareholder shares, the legislation provides for any gain to be treated as a capital gain – which, as we have seen, is exempt from tax.
The company will be able to claim a deduction for corporation tax on the value of the shares given to an employee shareholder.
Is it worthwhile?
For existing employees, it is difficult to see why anyone would agree to forfeit important rights in exchange for a small shareholding – or a larger shareholding on which he will have to pay tax - on which he will only ever make a gain if the company is sold.
A worrying feature of the new scheme is the right for employers to offer employment to new recruits on the basis that they must become employee shareholders. It would be possible for an employer to offer job candidates only the bare minimum of £2,000 worth of shares, to restrict those shares so they have no rights to dividends, and in exchange get an employee who can be sacked on a whim and who can be got rid of for the small (compared to redundancy pay or compensation for unfair dismissal) cost of £2,000.
Although any company can take up the scheme, the theory is that it will be of use to new start-ups and smaller companies wanting to expand but nervous of the costs associated with employing someone. It remains to be seen whether it will be companies like these who use the scheme to offer jobs that might otherwise not have been available, or whether the biggest employers in the country use the scheme to erode rights that are important safeguards for working people.
Practical Tip:
If your employer offers you a chance to become an employee shareholder, don’t just think about the value of the shares you will be getting – think about the value of the rights you will have to give up.
