An update on employee owners (or should we say 'employee shareholders'?)
We updated you in our October ebulletin about the Government’s proposals to create employee owners, who will exchange specific employment rights for shares in the company they are employed by. Our article on the proposals can be found here.
A consultation was released by the Department for Business, Innovation & Skills on 18 October 2012 and lasted just over 2 weeks, which is a very short period of time by the usual standards. The Government released its response to the consultation on 3 December 2012. The responses to the consultation showed that very few of the respondents were in favour of the proposals, but despite this the Government is going ahead anyway. They plan to bring the proposals into force very quickly - by 6 April 2013.
Very briefly, important points in the response were:
- The Government will issue new guidance for individuals about the personal consequences of employee owner status, and guidance for businesses about its implementation, including guidance on valuation and forfeiture of shares. As the guidance is not yet written, it is unclear whether this will sufficiently address concerns around the valuation of shares which we feel could potentially lead to more, not less, litigation.
- The current term of "employee owner" is to be changed to "employee shareholder" which the Government felt to be a better description of the status.
- As announced in the original proposals, the shares will be exempt from Capital Gains Tax. The upper limit of £50,000 on the value of employee owner shares will be removed, although this value will be retained as an upper limit (as at the time of acquisition) on the value of shares qualifying for the Capital Gains Tax relief.
- The Government has said it is considering options to reduce income tax and NICs liabilities arising on the acquisition of the shares. The current proposal is that there will be an option to deem that employee shareholders have paid £2,000 for shares they receive which would mean that the first £2,000 worth of shares would be free from income tax and NICs. However, shares valued above £2,000 will incur liabilities.
- Requiring employee shareholders to give 16 weeks' notice of return from additional paternity leave, rather than 6. This will then tie in with the requirement for an employee shareholder to give 16 weeks’ notice of early return from maternity or adoption leave, as opposed to the 8 weeks normally required.
- Non UK-registered companies will be allowed to use employee owner status within the UK. It will also be possible to for an employer who is a subsidiary to issue shares in the parent company.
The employee shareholder status will be incorporated into the Employment Rights Act 1996. The proposed amendments to the Act are being introduced to Parliament in the Growth and Infrastructure Bill 2012-13. For the current status of this process please see here. The Capital Gains Tax exemption for employee owner shares (and any other tax legislation required) will be introduced as part of the Finance Bill 2013. HM Treasury plans to consult separately on the tax issues.
It is not a surprise that the Government is forging ahead with this plan despite the lack of support and the many concerns that have been raised by respondents to the consultation. It is a headline grabbing idea and the Government has never hidden its admiration of employee owned companies. When the guidance is issued it may be clearer how the Government plans to address the many concerns raised and as always, the devil will be in the detail. This could be an idea that really takes off in the future, or it could fall flat on its face and be scrapped in a later Government’s “red tape review.”
We would be interested to hear if you are an employer who would consider offering individuals the status of “employee shareholder”? Why not email us at firstname.lastname@example.org or comment on Twitter or LinkedIn.