Chancellor announces new tax-advantaged employee ownership regime

Out-Law News | 08 Oct 2012 | 3:22 pm | 2 min. read

Employees could be given shares in their companies in exchange for giving up certain employment rights under plans for a new type of employment contract announced by the Chancellor of the Exchequer.

The new 'employee-owner' contract, announced by George Osborne during his speech at the Conservative Party conference, is expected to be available from April 2013. Any profit on shares awarded under the contract will be exempt from capital gains tax.

The new regime is principally aimed at smaller companies and those anticipating fast growth, but will be available to all new and existing companies, regardless of size.  Companies will be able to choose whether to offer only the new type of contract to new employees, but employee-owner status will be optional for existing employees.

Under the new regime, employers will be able to give shares to employee-owners with a value of between £2,000 and £50,000. In exchange, the employee could be asked to give up rights in relation to unfair dismissal, redundancy, the right to request flexible working and time off for training, and the time limit for giving notice of a firm date of return from maternity leave.  Companies will continue to have the option of including more generous employment rights into contracts with new employee-owners.

The shares will also have forfeiture provisions, likely intended to provide a mechanism for employee-owners to sell their shares when they leave employment. Further details of these are yet to be published. In addition, if the shares increase in value, the gain will not be subject to capital gains tax when the shares are sold.   

“For some employees and some companies, the employee-owner contract could work well - the devil will be in the detail," said Judith Greaves, share plans and employee incentives expert at Pinsent Masons, the law firm behind Out-law. 

A government consultation into some of the detail of the new regime is expected later this month, when more information as to how the new contracts are intended to operate should become clear. Some of the detail still to emerge is around the tax treatment of the employee and employer when the shares are acquired, as well as how private companies may manage increased numbers of minority employee shareholders. 

"Capital gains tax breaks are clearly attractive, if you can sell your shares and realise a gain, but we have yet to see more detail of how the rules may facilitate share sales by employee owners," said Greaves. "Employers and employees will need a full understanding before deciding on the overall benefit, but they should approach this with an open mind.”

George Osborne referred in his speech to the work done in relation to employment law reforms by Adrian Beecroft. The Beecroft report published in May this year was, according to Business Minister Mark Prisk, "intended to feed into the work that the Department [for Business, Innovation and Skills (BIS)] is carrying out to review employment laws to ensure that they maximise flexibility and reflect modern workplace practices,"