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Employee Shareholder Contract Update

Posted on April 18, 2013

The Government has struggled to reinstate the controversial Employee Shareholder Status (ESS). It was originally rejected by the House of Lords on 20th March and again on 22nd April, but finally succeeded on a third attempt on 24th April, after a number of concessions were proposed.

The new employment contracts will be completely voluntary. We set out the below concessions that the Government proposed in their attempt to stop the draft legislation ping-pong and which finally secured House of Lords approval to the measures (contained in clause 27) of the Growth and Infrastructure Bill.

The further concessions include:

  • a provision that the employee cannot accept the offer within seven days of it being made (how that would work in practice is unclear, and an employer remains free to refuse to offer the job to a prospective employee who doesn't want to take up employee shareholder status
  • a written statement setting out the rights that the employee is giving up
  • a written statement setting out the details of the shares being offered (including whether they are voting or non-voting shares), whether they carry a dividend, and whether they carry a right to a share in the company's assets if it is wound-up, whether pre-emption rights are excluded, and details of drag-along and tag-along rights
  • a requirement for a company to offer independent legal advice to workers offered a "shares for rights" arrangement.

In this significant last concession, any company proposing to ask workers to abandon their employment rights in return for shares will be required to ensure that employees receive free independent legal advice, regardless of whether they decide to take up the new independent employee shareholder status.

The legal advice cannot come from any lawyer connected with the company proposing the shares for rights scheme.

That legal advice will cover the terms and effects of the new employment status, including precisely what employment rights will be lost. The advice will also cover the terms and effect of the shareholding including whether they cover voting rights, a right to dividends, the distribution of any surplus assets, the redeemable value of shares and whether they can be sold.

Where there is a cost to the advice, the company will have to meet the reasonable costs, even if the individual does not take up the Employe Shareholder Contract. This requirement is different from the usual position of an employer offering (but not being compelled) to pay or their employee's legal advice on compromise agreements settling statutory claims rights where the employer only pays if the agreement is completed and the employee takes the deal.

The Government has also announced that it will introduce an exemption within the benefits in legislation to ensure that the cost of the legal advice will not lead to an income tax charge to the individual.

The Government had made some earlier concessions to the original proposals:

  • a jobseeker who refuses a job on an employee shareholder basis will not automatically forfeit their unemployment benefits
  • the first £2,000 of shares given to the employee will not attract income tax (amounts above this will attract an immediate charge)

Employee Shareholder Status requires that employees sacrifice some of their basic UK employment rights in return for a tax exempt award of shares. The rights to be exchanged relate to redundancy, the right to request flexible working, time off for training, unfair dismissal, as well as a doubling of the notice of return to work from maternity. In exchange they can be awarded £2,000 - £50,000 of ownership (shares) in their employer business. These shares will be exempt from Capital Gains Tax (CGT).

In his March 2013 Budget statement, the Chancellor of the Exchequer said that the start of the scheme would be delayed until 1st September 2013 and that income tax relief would be given in relation to the first £2,000 value of the shares.

The relevant clause of the Growth and Infrastructure Bill will now pass, with these further amendments, for Royal Assent and we currently anticipate a 1st September 2013 commencement date.

Given that the above concessions still fail to address many of the fundamental criticisms in relation to the operation of the measures (e.g. share valuation and taxation) it seems unlikely that there will be any significant uptake. The new arrangements may however have some appeal to US in-bounds and companies who are not eligible to operate any other tax favoured HMRC approved employee share plans.

The Finance Bill also has provisions in relation to the tax treatment of a company repurchase of Employee Shareholder Shares from a leaver.

There has been some debate about the CGT exemption and company reorganisations. HMRC have (via the HMRC Employment Related Securities Forum in May 2013) now confirmed that CGT exemption would not automatically transfer to the new holding of shares after a reorganisation. Section 127 of the Taxation of Chargeable Gains Act 1992 (which acts to prevent the reorganisation being treated as a disposal and instead treats the original shares and the new shares as being the same asset) does not currently apply to exempt employee shareholder shares a gain will accrue, but the gain will be exempt. Shares within the new holding will not however be exempt from CGT unless they are specifically issued as exempt employee shareholder shares.

Should you have any questions regarding this announcement or its impact in relation to share plans you have or are considering then please contact Liz Hunter on 020 8949 5522 or email Liz.Hunter@rm2.co.uk.

 
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