Shares For Rights Proposal Attracts Controversy
During the Conservative Party annual Conference 2013 held in Birmingham, the Chancellor of the Exchequer, the Right Honourable George Osborne MP, publicised his plans for a new type of employment contract to be known as an owner-employee contract (now Employee Shareholder Status [ESS]), designed for fast-growth small and medium sized businesses.
It is safe to say that few people saw that one coming and many are questioning the feasibility of the plans.
This new contract is intended to be effective from April 2013 but is subject to further consultation. Further details will be published following the consultation period and RM2 will be submitting representations to Government in response in due course.
In the meantime we wish to share with you the plans as currently proposed and allay any concerns about any negative collateral impact on existing or prospective share plan awards.
Whilst this new owner-employee contract is being targeted particularly at smaller fast-growth enterprises, businesses of any size would be able to adopt this new arrangement. So what does this new contract entail?
According to the proposals, owner-employee status will be optional for existing employees, but both established companies and new start-ups will be able to choose to offer only this new type of contract for new hires. Companies recruiting owner-employees will continue to have the option of inserting more generous employment conditions into the employment contract if they want to but the sceptics will say that it opens a door for exploitative behaviour by employers.
The owner-employee contract will require 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).
Those of us familiar with Treasury press releases know that what is not said is often more telling than what is, It is therefore crucial to note that the press release made no mention of an exemption from Income Tax or National Insurance and HMRC policy adviser savings and share schemes, John McLoughlin, has since confirmed that Income Tax and National Insurance charges are not exempt. This means that the initial transfer of shares to an employee will be chargeable to income tax and, potentially, NIC. It’s already starting to look less attractive now we know that. In addition, employees would need to make individual gains in excess of the current £10,600 CGT exemption for this proposal to deliver any additional tax relief.
In reality many of these shares will be private companies where the shares cannot be readily converted to cash so whilst they may not be Readily Convertible Assets for National Insurance purposes it also means there is little if any share liquidity. Employers could of course create liquidity for shares through the creation of an internal market using an Employee Benefit Trust. The proposal also makes it clear that this new contract would not preclude equity awards also being made under existing employee share ownership plans such as the Enterprise Management Incentive.
The proposal has proved to be controversial with the trade-off off worker rights being heavily criticised from the moment the press release hit the news wire. A quick Twitter search using #sharesforrights produces a plethora of comments criticising the concept.
Responding to Osborne’s admission that employees will be steered to trade basic rights for shares and company equity, Employee Ownership Association Chief Executive Iain Hasdell stated:
“We welcome this latest contribution to the debate on employee ownership, but whilst growing employee ownership should be part of the UK’s Industrial Policy, such growth does not require a dilution of the rights and working conditions of employees – indeed employee ownership often enhances them.“
“Ownership matters. Employee ownership, creating businesses whose employees have significant ownership and involvement, offers a brilliant mechanism to spread business ownership from the few to the many whilst increasing productivity and innovation.”
Which bodes the question; could this new contract damage the positive view of employee ownership and the success it has brought?
Whilst we welcome measures to make an award of shares more attractive to employees it does seem the proposed trade-off of rights is somewhat misguided and a simple uplift in the limits of approved share plans like the Share Incentive Plan, combined with a reduction in the 5 year SIP maturity holding period, would, arguably, have been received far more warmly.
Please be assured that this change is subject to consultation and legislative approval and we would be staggered if the plans proceeded as announced yesterday.
Should you have any query regarding the Chancellor’s 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.