New employee shareholder contracts to offer CGT free benefits to staff

One very interesting new business tax relief opportunity announced in the 2013 Budget was the opportunity for employee shareholders to dispose of shares without incurring capital gains tax (CGT). This comes into effect in September 2013 and clearly shows the government is trying to help small businesses to expand their workforces and become more successful.

These new proposals effectively require an employee to relinquish some of their employment rights and adopt a new “employee shareholder” employment status. They are then able to acquire shares in their employing company through the adoption of this status. These shares will in turn attract new tax reliefs which will ensure that shares acquired up to a value of ?2,000 will not be subject to tax and national insurance contributions when they are acquired. In addition, sale proceeds received of up to ?50,000 from eventually selling the shares will not be charged to capital gains tax.

In return for this, under the terms of their alternative contracts, employees will forfeit the right to claim unfair dismissal and will not be eligible for redundancy pay; they will also lose the right to request flexible working hours and to have any time off for training (unless at the employer?s discretion). A further contractual change is the requirement to provide employers with 16 weeks? notice (compared with the usual two months) and new mothers will need to give their employer a fixed date of return from maternity leave.

Although these proposals are due to be effective from 1 September 2013, they may not fully come to fruition if they are considered to contravene employment legislation. It will be interesting to watch how the employment arguments unfold in the next few months.

It is clear that in designing this policy the government is looking for ways to help entrepreneurs and small company owners by making it easier for them to recruit talented people without the fear of onerous employment restrictions, whilst also inspiring them to succeed. The economy continues to be depressed in many sectors, yet the challenging market conditions mean most company owners say they have never been so busy. This new way of offering employment contracts will offer a flexible and less risky way to expand a workforce, if it is allowed to proceed in its proposed format.

Giving shares to employees still needs careful consideration however, because making employees shareholders of course has its own issues, and if you already operate an EMI (enterprise management incentive) share option scheme, this may be something you can offer as an added incentive.

What makes this proposal particularly interesting is the way it seeks to address a particular problem for business owners; the increasing litigation culture. In our view this new policy, if allowed to progress, will offer a good way to help business owners reduce some of the risks of employing staff in return for offering their employees more involvement in the company. It should be a way for smaller company owners in particular to become a more attractive employment proposition, helping them to recruit the best talent for their growing businesses.

Lesley Stalker is a tax partner at Surrey accountants, RJP.

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