Business Finance: Peter Harrup explains ‘Employee Shareholder’ employment contracts

Peter Harrup of BDO LLP.

Peter Harrup of BDO LLP. - Credit: Archant

New “employee shareholder” employment contracts can now be set up by employers and I expect many businesses will benefit from the new scheme.

The basic premise of the scheme is that the employer offers employees shares (worth at least £2,000 but not over £50,000) in return for less protection under employment law.

Employees may be asked to give up their contractual rights in relation to unfair dismissal, statutory redundancy pay, flexible working and time off for training and must give more notice on return from maternity leave.

However, companies can offer more generous employment conditions so, effectively, employers will be able to pick and choose which rights are foregone.

Equally, there is plenty of protection for company owners who don’t want to lose control of the business. There is no need to offer the scheme to all employees and the shares need not be full ordinary shares carrying voting and dividend rights ? although reduced rights shares will, of course, have a lower value.

Employers can also impose transferability conditions and pre-emption rights on the shares, but rules ensure that the company cannot simply take the shares back if an employee leaves.

The tax break for employees will deem them to have paid £2,000 for the shares, effectively giving relief from Income Tax and NIC on receipt of the shares. They will also be completely exempt from Capital Gains Tax when the individual eventually sells the shares.

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While there is no need to seek approval from HMRC before starting a scheme, it is mandatory that any employee or prospective employee receives a written statement setting out their rights and entitlements. Employees must also receive independent legal advice (which the company must pay for) on the implications of entering the scheme.

This is a voluntary scheme. Employers can choose to offer the new employee-owner contracts, or stick to existing ones. They can choose to offer it to existing employees or just new employees. For new employees, they can offer the new contract on a “take it if you want the job” basis.

I believe that the new scheme offers employers a highly flexible way to motivate employees and will become a valuable addition to the existing range of share schemes. Even if the new employee shareholder scheme is not for you, there are already many tax-efficient ways to motivate your employees ? contact me for advice on which would work best for you.

: : Peter Harrup is a partner at the Ipswich office of BDO LLP.