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Government is considering reduction of tax and NI in bid to bolster shares-for-rights scheme

The Government will consider waiving income tax and national insurance contributions (NICs) on the first £2,000 in value of shares awarded to employees in return for their giving up some of their employment rights under the new "employee owner" proposals. 05 Dec 2012

The move was announced in the Government's Autumn Statement (93-page / 2.70MB PDF) and could make the shares-for-rights plan more attractive for employees.

'Employee owner' status was announced in October as a third form of employment status, alongside 'employee' and 'worker', taking effect as a new form of equity-linked employment contract.  In exchange for giving up certain employment rights, employees will become owners of a stake in the business they work for by being given shares in the employer company worth between £2,000 and £50,000. The Government had previously announced that any profit on those shares will be exempt from capital gains tax (CGT) when the shares are sold. 

"The Government is ... considering options to reduce income tax and National Insurance contributions (NICs) liabilities that arise when employee shareholders receive their shares, including an option to deem that employee shareholders have paid £2,000 for shares they receive," said the Statement. "This option would mean that the first £2,000 of shares received under the new status would be free from income tax and NICs."

The Government acknowledged that only a small number of responses to a consultation on the proposals thought that there would be any take-up of employee-owner contracts. It has confirmed, though, that the plans will be taken forward, and is introducing some changes designed to address concerns raised in responses to the consultation.

The Government will change the name of employee-owners to employee-shareholders and will include legislation for the scheme in the Growth and Infrastructure Bill, which is currently being considered by Parliament.

The Government has proposed a number of amendments to the draft legislation previously put forward, including enabling the Secretary of State to increase the minimum share value of £2,000; removing the upper threshold of £50,000 to allow businesses to offer more shares under the scheme, but not raising the £50,000 exemption from CGT; changing the notice period for return from additional paternity leave to 16 weeks so it is consistent with change in the notice period for return from maternity and adoption leave, allowing non UK-registered companies to benefit from the status, and allowing shares to be issued by both the employing company and its parent company to ensure the scheme is sufficiently flexible to encourage widespread appeal.

Share plans expert Matthew Findley of Pinsent Masons, the law firm behind, said that the changes made to the proposals were unlikely to provide an answer to the scheme's critics.

"The Government’s decision to press ahead with the introduction of employee-owner contracts, despite widespread criticism, is not surprising given the amount of political capital originally invested in the idea," said Findley. "The level of opposition to the proposal is clear from the Government’s response to the consultation but little of what has been said so far is likely to improve the position.  Critically, the income tax position of employee owner shares has yet to be finalised.”   

“There is nothing in what the Government has said so far that would stop senior executives or substantial shareholders from participating in the arrangement," added Findley. "This may mean that an opportunity may still exist for such individuals, even if they may be viewed by some as the 'wrong' people politically.”

A further HM Treasury consultation on income tax aspects has previously been announced, but has not yet been published. Draft legislation on at least some of the tax aspects is expected next week, and a period of consultation may follow.