The Chancellor recently announced an
outline plan to enable “employee owners” to receive shares with the benefit
of zero capital gains tax in exchange for accepting reduced statutory
Whether these will be sufficiently
attractive carrots to employee and employer to justify diversion from the
well-trodden path for emerging companies of granting simple and highly
flexible Enterprise Management Incentive (“EMI”) options remains to be seen.
Our initial reaction is that we haven’t
seen enough as yet to justify deferring proposed EMI option grants back to
the anticipated “go-live” date of next April, but we will update you when
more detail is made available.
The key points are:
- Under a new type of contract,
employees (“employee owners”) would be “given” between £2,000 and
£50,000 of shares. In exchange, employee owners would lose their
statutory rights on unfair dismissal, redundancy, and the right to
request flexible working and time off for training, and will be
required to provide 16 weeks’ notice of a firm date of return from
maternity leave, instead of the usual 8 weeks.
- Current employees could also
be moved onto employee owner contracts, but couldn’t be forced to do
so. New hires could be offered employee owner status or conventional
contracts at the employer’s discretion.
- Companies of any size would be
able to use this new kind of contract. (This differs from EMI, which
is restricted to smaller companies, with fewer than 250 full-time equivalent
employees and no more than £30m of balance sheet assets.)
- Companies recruiting employee
owners would continue to have the option of inserting more generous
employment conditions into the employment contract if they wanted to.
As such, it seems that if an employer wants to offer the tax benefit
without (wholly or partly) the loss of employment rights it is free to
- Employee owners would pay 0%
capital gains tax on gains on the disposal of shares awarded as part
of their contract. They would also be eligible for existing employee
share ownership schemes such as the EMI. (Gains on EMI options are
taxed as capital gains rather than employment income, giving
favourable tax results.)
- The Government will consult on
details of the contract later this month, when more detail will
hopefully be given. Draft legislation is due later this year, with the
“go-live” date being April 2013.
- The Government consultation
will apparently include details of restrictions on forfeiture
provisions to ensure that if an employee owner leaves or is dismissed,
the company is not able simply to take the shares back but is able to
buy them back at a reasonable price. (This seems more restrictive than
the approach usually adopted by employers on employee shares, as
typically employees who leave through their own choice or as a result
of misconduct - “bad leavers” - will not be entitled to receive more
than they paid for the shares when leaving.)
Obvious immediate questions are:
- Can share awards vest over
time or according to performance, or will employee owners become 100%
vested on day one? The latter would clearly be unattractive to
founders. To date HM Revenue & Customs approved share schemes have
permitted (or sometimes required) an element of deferred vesting in order
to encourage employee loyalty.
- Must “bad leavers” also be
entitled to a reasonable price on leaving? Again that would seem
unattractive. It may be that the government intends to specify
permissible “good leaver” / “bad leaver” provisions, but on this we can
only wait and see.
- What will the income tax
treatment of “giving” the shares to an employee owner be? Will that
trigger an income tax charge on day one, as seems likely? That would
be potentially problematic. The government’s intention here is simply
- What will the valuation base
be for the £2,000 minimum value requirement? For many start-ups, the
£2,000 threshold could lead to individuals ending up with significant
stakes in the business. There may be a tension with companies wanting
to obtain a low valuation for EMI purposes but needing to show a
higher value to get more employees into “Employee Owner” status.
Obtaining a low share valuation at the time options are being granted
is a key element of maximising the benefit of EMI option grants for
employees, so this may be a more significant issue in practice than
those developing this policy understand.
We will monitor developments.
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