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HM Treasury is to move to alleviate worries about the potential income tax and National Insurance (NI) liabilities of his employee-shareholder scheme.
The proposed arrangement – announced in October – would see workers give up some employment rights in exchange for capital gains tax-free shares in their employer’s company.
The minimum value of shares stands at £2,000, with the secretary of state able increase the figure. A cap of £50,000 was originally set but has been removed – although the tax exemption of the same amount remains the same.
Only a “very small number” of respondents to an official consultation welcomed the plan, the Department for Business, Innovation and Skills (BiS) said yesterday, while many more raised the concern that the tax advantages could be abused. Parties also expressed uncertainty about valuation and income tax implications for individuals.
In his autumn statement today, the chancellor, George Osborne, said he and his team would look how to reduce income tax and NI liabilities that arise when a person receives his or her shares.
Options include deeming that the individual has paid £2,000 for the shares, whatever the number, meaning the first £2,000-worth would be free of income tax and NI contributions.
Those who agree to an employee-owner will be obliged to sacrifice rights relating to unfair dismissal, statutory redundancy pay, flexible working and requesting training.
They will be also be expected to give 16 weeks’ notice of their intention to return from maternity leave, adoption leave or additional paternity leave, eight weeks earlier than other workers.
Individuals who opted for the employee-owner contract in its current state would face an immediate and sizeable income tax bill, warned Ross Welland, tax partner at accountancy firm Littlejohn.
There is a “very real prospect” that companies will offer shares that far exceed the potential value of the employment rights given up, he said.
“When the value of the shares granted to employees exceeds the value of the employment rights they give up, the employee is immediately liable for income tax on the difference in value.”
With the employee-owner scheme expected by the BiS’s respondents to be limited to micro-businesses and some growing companies, Welland cited the example of a junior member of staff on a £10,000 annual salary.
“[He or she] could be given shares worth £2,000, but the value attributed to the rights they give up in exchange is treated as virtually nil… The employee would then have £400 tax to find, with a possible further impact on tax credits claimed.”
He acknowledged that calculating the income tax bill would be “headache-inducing” because there is “no hard and fast algorithm for calculating the value of… employment rights”.
It will depend on the individual and his or her role in the company, said Welland, who added, “HMRC may take a different view on the fair value of the shares received by the employee – which could result in sticky and unpleasant negotiations.”
