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Complexity of Tory share scheme could discourage employers

RODGER CAIRNS, partner at Shepherd and Wedderburn, examines the plans announced by Chancellor George Osborne to allow firms to offer employees tax-favoured shares in exchange for waiving some of their employment rights

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Under the Chancellor’s proposals, firms could offer their staff shares worth between £2,000 and £50,000 which would be exempt from Capital Gains Tax (CGT) when sold.

In return, the employee would agree to give up some of their statutory rights on unfair dismissal, redundancy and flexible working hours. Treasury aides said the scheme would be open to all businesses and claimed that it had already been agreed with their Liberal Democrat partners.

If, as the Coalition hopes, the proposals get fast-tracked through Parliament, they could be implemented next April with a significant cost to the Government of £100m in lost CGT revenues by 2017-18.

As with most party conference announcements, which are focused much more on grabbing a headline than explaining the finer points of detail, there has been very little information on the proposals released to date.

What we do know is that they come on the back of a review on employment rights by Adrian Beecroft, which called for changes to make it easier for companies to hire and fire staff. While the principle may find favour amongst many employers, one of the country's biggest business groups, the CBI, has been less than enthusiastic about this week's announcement, calling it a 'niche' proposal.

According to the Chancellor's own advisors, the proposals are being particularly targeted at small, fast-growing businesses. However, I don’t see it being of particular interest to the very smallest companies because, for one, they will not like the idea of increasing their shareholder base as this can make their day-to-day operations far more complex.

There are also likely to be practical complications in valuing shares, while the lack of liquidity in an employer's own existing shares may also give rise to additional problems. Likewise, employees of these small companies may be reluctant to surrender potentially valuable rights for an illiquid, minority interest in their employer company.

As with all Government announcements, the devil will be in the small print and some detailed questions need to be asked, including: what are the tax implications for these shares? Although the Treasury's press release confirms the CGT position, will an employee receiving these shares for free have to pay income tax on them at the outset?

Will there be a prescribed method for valuing the shares to prevent an unscrupulous employer deceiving a worker by 'gifting' them a worthless asset?  If so, will it be possible and necessary to agree this value up-front with HMRC? Will the shares have to satisfy certain minimum criteria as to their inherent rights?  For example, will they have to confer voting rights?  Will they need to be eligible to receive dividends?

Will employees be required to hold on to their shares throughout their employment or will they be able to sell them whilst still in post if they wish? Also, if an employee leaves their firm will companies be allowed to force them to sell their shares and, if so, who and what circumstances will determine their price? What will happen if the company is unable or unwilling to purchase a departing employee's shares?

From what we do know of these proposals, I suspect they are likely to be far more attractive to larger companies that are either already listed or which have an established culture of employee share ownership.

It is likely that, amongst these larger organisations, it would primarily be used as a tax efficient reward mechanism rather than a device to actually remove employment rights. Indeed, according to the Treasury statement, it does seem possible for companies to offer shares under the scheme whilst preserving the status quo under employees' contracts.

As things stand, I'm not convinced the Chancellor has found a workable solution to an identified problem. The principle objective of this proposed share scheme is to encourage smaller employers to take on staff by enabling them to remove administrative and legal obstacles that are currently enshrined in UK employment law.

I suspect, however, that the practical headaches involved in implementing and operating a wide-scale employee acquisition programme of this kind would be every bit as burdensome for these organisations as the employment legislation it seeks to circumvent. 

We will watch with interest to see if these plans are implemented as currently proposed or whether an alternative approach to encourage both wider employee share ownership and increased flexibility in the work place will emerge over the coming months.

Rodger Cairns, is partner and head of the Employee Share Incentives team at Shepherd and Wedderburn LLP

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