As part of the Budget in March 2012, the Chancellor announced new measures designed to provide employees with shares which can be sold free of Capital Gains Tax in the future, but are given in return for employment rights. But is this a fair way to incentivise key employees? Will the employees understand the implications of the rights they are giving up? Furthermore, will such employees be made aware that there are other tax efficient share schemes available to their employers for incentivising them?
When the Chancellor held the 2012 Budget in March this year, commentators were surprised when he announced the new measures with regards to shares. In simple terms, tax legislation will allow employers to offer shares to employees which can later be sold free of Capital Gains Tax. In return the employee will give up certain employment rights. The plans for these measures were reiterated in the Autumn Statement 2012.
However, unsurprisingly these announcements have not gone down well with unions and employment specialists alike. The proposals are expected to come into force in April 2013. Employers will be able to give shares with values between £2,000 and £50,000 for free, but in exchange for key employment rights. For the purposes of the proposals, the employment rights will be limited to those not governed by European directives such as:
o Unfair dismissal
o Redundancy payments
o Flexible working
o Mothers returning from maternity leave will need to give double the notice of their return to work
However, as with most government policies, all may not be as it seems. It might seem straightforward, but consideration needs to be given to claims which can potentially cross boundaries. For example, sex discrimination and flexible working or maternity leave. What about if employees leave? The terms are not always great, but then they will leave with share ownership in a company which will potentially roll up into a tax free gain for them in the future. It is also unclear as to how the scheme will be operated. Will Share Assets and Valuations at HMRC deal with applications? Who will deal with the legal minefield which may erupt if matters are not dealt with correctly?
One point to consider is how this scheme will interact with the already beneficial Enterprise Management Incentives Scheme. At the moment, a key employee can be granted specific share options at an agreed value. They will then exercise these options at a point in the future which is agreeable to the employee and employer. Whilst not tax free, with the right planning only Capital Gains Tax of 10% will be paid. Furthermore, no employment rights will need to be foregone.
The government is planning to hold a consultation on the scheme, but any employer and employee will be advised to explore all options before looking at these plans.
Article written by Vicky Hulme, specialist in UK employment law.