Shares in exchange for employment rights
The Government have announced plans to provide "owner employees" with shares in exchange for giving up employment rights.
The scheme - announced in October by George Osborne, the Chancellor of the Exchequer, at the Conservative Party Annual Conference – envisages a new category of worker, the "owner-employee". Employers will be able to enter into a contract whereby the owner-employees give up a number of statutory rights – including redundancy pay and unfair dismissal - in return for which they will receive a number of shares in the company – to the value between £2,000 and £50,000. Crucially, these shares will not be subject to Capital Gains Tax when they are sold.
The scheme is aimed at small and medium sized companies which are growing fast, although it is proposed that the new contract may be used by any company. It is envisaged that following a period of consultation, the new provisions will come into force in April 2013. Existing employees will have a choice of whether or not to accept an offer of an owner employee contract but employers will be free to offer them to new employees as they think appropriate. On termination of employment the employer must offer a "reasonable" price for the shares.
This is an interesting development, it appears that the Government believe that this will be less controversial than the proposals made in the Beecroft report simply to remove unfair dismissal rights from all employees in small businesses. Although, at first sight, it may appear a reasonable compromise with the attraction of equity participation in the company offsetting the risk of loss of employment protection, £2,000 may be seen as a little low as a starting point and no real benefit will accrue to the owner employee until the gain in the value of the shares exceeds the annual exemption level for CGT purposes (£10,600).
Much of the devil will be in the detail – will employers be able to create special classes of share, perhaps without voting or dividend rights? And, perhaps most importantly, how will a "reasonable" valuation be reached on termination given the notoriously difficult process of valuing shares which are not publicly traded, particularly in smaller companies? How will any disputes be settled? What will happen if no one wants to buy them?
Some answers to these questions may emerge as an outcome of the recent government consultation. We will report further as more details of their intentions become available.
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