Business Finance: Peter Harrup of PKF on new employee-owner employment contracts

THE Chancellor’s proposals for new employee-owner employment contracts could spark radical changes from April 2013 for employers who choose to use them.

The basic premise 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 rights in relation to unfair dismissal, redundancy, 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 if they want – so, effectively, employers will be able to pick and choose which rights are foregone.

The employee will pay no capital gains tax when shares are sold but will pay income tax and NIC on the value of the shares received, i.e. the current �10,600 annual exemption for gains will not be used up on sale.

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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. But will it be popular?

Leaving aside possible legal issues, the scheme raises a number of the practical problems for SME employers that I commonly see with existing employee share schemes.

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For example, small company owners may not wish to give away shares and lose 100% control of the business. If they do give away a small number of shares, for tax purposes, such minority shares holdings have a much discounted value so it may be difficult to reach the �2,000 limit. Also agreeing a market value with HMRC could prove to be disproportionately expensive.

From the employee’s viewpoint, there will be rules ensuring the company cannot simply take the shares back but is able to buy them back at a reasonable price.

Personally I am hoping that this does prove a useful additional idea to incentivise share ownership, particularly as this does not appear to exclude some sectors where similar schemes are not currently available e.g. hotels, property developers and nursing homes.

Even if the new employee-ownership contacts are not for you, there are already tax-efficient ways to motivate your employees.

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