There has been much talk in the media recently about the new ‘shares for rights’ law which is expected to come into full effect from 1 September 2013, including reports of heated exchanges last week between the House of Lords and House of Commons. But why has the introduction of a new employee share incentive arrangement caused such debate?
What do the new rules say?
An ‘employee shareholder agreement’ involves an employer and employee entering into an ‘employee-light’ contract, where the employee accepts fewer statutory employment rights in exchange for shares of any class with value of at least £2,000. The statutory rights given up are:
Furthermore, tax rules will be introduced so that the first £2,000 of shares awarded as part of such an agreement will not be subject to PAYE or NIC. In addition, subsequent growth on these shares (and growth on up to a further £48,000 of shares acquired as part of the agreement) will be exempt from CGT.
Why is the government introducing these rules?
The government has long encouraged employee share ownership to better align the interests of employees with the businesses they work for, as it believes (amongst other things) that this increases productivity. However, there is still reluctance amongst some businesses to offer shares to employees. The availability of these new ‘employee-light’ agreements is intended to reduce some of the red tape and costs relating to statutory employment rights, whilst also encouraging employee share ownership.
What has the response been to these proposals?
Not good! When the government consulted on the idea in October 2012, only 3% of those surveyed felt that the take up would be positive, with particular concern that the new status would be complex and costly to operate, with uncertainty around valuation and the income tax implications for individuals.
The TUC said that it is fundamentally opposed to the government’s proposals, being ‘extremely concerned that this proposal could see employees trading valuable protections at work for shares that could turn out to be almost worthless … Where businesses go to the wall, an employee’s shares will have very limited value or more likely they will be worthless. However, unlike other employees, ‘employee owners’ will not be entitled to recover any redundancy payments.’
Further objections were raised by the House of Lords, who expressed great concern about the erosion of employee’s rights in exchange for as little as £2,000 in shares.
Subsequent drafts of the legislation have sought to address some of these concerns. For example, employers will have to provide a written statement making clear what employment rights would be given up, and what share rights would be acquired in exchange. The individual must also receive independent legal advice before accepting an offer. The employer must pay the reasonable costs of that advice. So there will be some employee protection, but also more complexity and red tape.
Further provisions were introduced so that the first £2,000 of shares acquired are not subject to PAYE/NIC, but there will still be a PAYE/NIC tax charge on acquisition (requiring funding by the employee) to the extent that the shares are valued above £2,000. Whilst existing valuation principles will apply (there was originally talk of introducing new valuation rules), it remains uncertain as to whether HMRC will introduce some sort of advance clearance process for these arrangements so that both parties can be sure they have hit the necessary threshold to qualify.
Who is this likely to appeal to?
Large companies, particularly those with a unionised workforce, will need to consider whether such arrangements will be suitable for them, and think about the potential reputational risks down the line, e.g. in the scenario regarding redundancies envisaged by the TUC.
Furthermore, whilst the original intent was to reduce red tape, the need for safeguards has meant that these arrangements will be quite bureaucratic to put in place and will require independent professional advice, with the associated costs. This could deter those small businesses which may have been the intended target for these changes.
Nevertheless, the new proposals will certainly be of interest to some businesses and a valuable addition to their incentive arrangements, notwithstanding the difficulties. Those businesses that already use equity incentives may be more comfortable with the idea, and it may feel like a risk worth taking for some individuals, particularly those working for fast growth, entrepreneurial companies where the potential upside outweighs the loss of statutory employment rights.
Bill Cohen
Partner, Deloitte
Email: wacohen@deloitte.co.uk
Tel: 020 7007 2952
The employee shareholder rules are contained in the Growth and Infrastructure Act, which received Royal Assent on 25 April.
