How will George Osborne’s new share scheme work?
"Workers will be asked to surrender
employment rights in return for shares in their company under plans to boost
enterprise announced by George Osborne. People who accept the shares will have
to waive their rights to redundancy or to sue for unfair dismissal and will not
be able to request flexible working hours. The Treasury will not levy capital
gains tax when workers sell their shares, which can be worth between £2,000 and
£50,000." - Daily Telegraph
I don’t wish
to enter the political debate on whether employees in small businesses should
be able to opt for reduced employment rights, or whether they should have full
rights at all. But how would this proposal work on the shares side? I strongly
suspect that if it ever sees the light of day, this will be one of those
schemes that languishes largely unused – unless it becomes a bonanza for tax
avoidance.
Of course
there are few details available beyond what George Osborne said in his
Conference speech. A
Government press release adds a couple of points, and promises a
consultation, so the promise to “rush through” legislation to be in force by
April 2013 looks unlikely to be fulfilled.
So what are
the issues that would have to be addressed?
·
Under present legislation, the value of the
shares (between £2,000 and £50,000 we are told, assuming this means value when
they are given) would be immediately charged to income tax, and usually national
insurance, when the shares were given. But the new “owner-employee” would have
no money to pay the tax, other than his other earnings. Mr Osborne says there
will be an exemption from CGT, but doesn’t mention income tax. Will there be an
exemption?
·
If so, HMRC has been tightening up on employers
finding was to confer tax-free benefits on employees, including through
employee shares, and this could blow a hole in their strategy. What will stop a
senior employee waiving his bonus (and his employment rights) and instead
receiving £50,000 in tax-free shares, which he then sells back tax free?
·
Further income tax charges can arise if the
shares are subject to restrictions or risks of forfeiture. If these rules are
waived, further tax planning opportunities open up.
·
If the company buys back its own shares within
five years of their issue, the gain made by the employee is normally charged to
income tax and not CGT, so the promised exemption from CGT looks a bit hollow.
·
Most small businesses are very reluctant to part
with equity in the company. Minority shareholdings can be a significant brake
on the development of the business, especially if they remain after an
owner-employee has left and ceases to contribute. But an open-ended commitment
to buy shares for cash if an employee leaves would be unaffordable as well as
unacceptable. Where is the cash going to come from? Most successful private companies
could not easily fund an obligation to buy a significant proportion of their
own share value.
·
In a start-up micro business the shares are
worth very little, so you get an awful lot of shares to make up a minimum market
value of £2,000. Entrepreneurs could find they have given away equity that becomes
extremely valuable once the business takes off.
·
It is an important part of employee share scheme
planning to avoid creating incentives for employees to leave. The press release
makes it clear that owner-employees must be entitled to full value for their
shares and cannot forfeit them as “bad leavers”. This is one of the many attractions
of employee management incentive scheme (EMI) options: the employee does not
get the shares until their value has been earned.
·
Unless a small business is looking for an exit
through sale, there will be no visible route for owner-employees to realise
their shares except by selling them back to the employer at a valuation. Companies
are reluctant to commit to buying shares at someone’s opinion of value. Employee
shares can become negative incentives if they fail to grow in value, or if
there is no realistic prospect of selling them.
