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Government publishes more details on "employee shareholder" arrangements

The Government today provided further detail in relation to its proposed new "employee shareholder" status, a new form of equity-linked employment contract.  11 Dec 2012

The initiative was first announced at the Conservative Party conference in October 2012 and its implementation was confirmed by the Chancellor of the Exchequer, George Osborne MP, during last week's Autumn Statement (93-page / 2.70MB PDF).  Further details have now been published in the form of draft legislation.   

'Employee shareholder' status has been proposed 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. Any profit on those shares will be exempt from capital gains tax (CGT) when the shares are sold. 

While the new draft legislation confirms the CGT exemption, the Government has yet to confirm the income tax treatment of employee shareholder shares. Tax expert Matthew Findley of Pinsent Masons, the law firm behind, said that the Government's "piece meal" approach to the new employment status was "perverse".

“Until details of the income tax position become available, companies will not be able to properly assess whether the arrangement is of interest," he said.  "It is perverse that the arrangement is being implemented in such a piece meal fashion.  The Government increasingly leaves itself open to allegations that the implementation of the arrangement is as poorly conceived as the arrangement itself.”

The draft legislation also fails to address concerns voiced when the proposal was first announced in relation to how the shares will be valued, a particularly difficult issue for unlisted companies, Findley said. “The Government has provided no further assistance on valuation other than to define 'value' for the purposes of the £2,000 threshold and the £50,000 cap.  Companies are otherwise left to battle with the valuation difficulties associated with providing shares to employees.  This will not encourage take up amongst SMEs and unlisted companies,” he said. 

The draft legislation also creates a further obstacle to listed companies using the arrangement. “The legislation prevents companies from using shares warehoused in employee benefit trusts.  This will severely constrain the ability of listed companies to use the arrangement,” he said. 

The Government has, however, sought to limit the scope for major shareholders to become 'employee shareholders' as part of the draft legislation. It has barred those who own 25% or more of a company from becoming employee shareholders.

"While this will go some way to alleviating the concerns expressed by the Institute of Fiscal Studies about the Government facilitating tax avoidance, there remains considerable scope within SMEs and unlisted companies for senior management to be provided with very tax-efficient equity in return for giving up employment rights which they probably don’t value or need,” Findley said.