Your shares or your rights?

Your shares or your rights?The Government is pushing ahead with its shares for rights scheme. It is included in the Growth and Infrastructure Bill that has been making its way through Parliament despite receiving a generally lukewarm response.

The scheme will create a new type of employment status called ‘employee-owner’. In return for giving up various employment rights, an employee-owner will receive shares in their employer’s company worth between £2,000 and £50,000 – with the shares exempt from capital gains tax (CGT). The employment rights given up include those relating to unfair dismissal, redundancy, and the right to request flexible working or time off for training.

For existing employees the new employee-owner status will be voluntary, but an employer could choose to offer only this type of contract to new employees. However, there is nothing to stop a company including more generous employment conditions into an employee-owner contract should it wish to.

The scheme has been criticised on a number of fronts, especially because it is seen as a back door way of reviving the previously shelved ‘fire at will’ proposal. Some employers may see £2,000 of equity as a small cost to pay for being able to hire employees with far fewer employment rights than normal.

Although the Government is keen for the new contract to be seen as a way of empowering employees, the shares acquired need not confer any voting rights. Nevertheless, having employee shareholders could be inconvenient in some circumstances. And the CGT exemption will be of little value for the average employee.

As it currently stands, the scheme could open up some useful tax planning opportunities, especially for more senior personnel. They could be given the maximum of £50,000 of tax-exempt shares, with the employer subsequently returning their employment rights. It may therefore be attractive to start-ups, where there is the potential for substantial gains. The planned introduction date is April 2013.