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Employee Shareholders

September 1st 2013 marked the birth of “employee shareholders”, a new category of employee which allows employers to offer employees a share of their business in return for the employee waiving a number of employment rights. The rights waived include the general right to claim unfair dismissal and the right to claim a redundancy payment. The new scheme also alters the statutory frameworks governing the return to work by employee shareholders from maternity/adoption/paternity leave and the making of requests for flexible working.

In return for waiving these rights, the employee receives a minimum level of shares in the employer’s business, for free.  A number of tax incentives have been introduced to encourage the use of these arrangements.  These include an exemption from income tax on the first £2,000 of shares transferred to the employee and an exemption from capital gains tax on the first £50,000 realised when the employee later sells the shares.

The Government anticipates that 50,000 to 80,000 individuals per year will assume this new employee status with the scheme appealing more to individuals who do not consider unfair dismissal or redundancy protections to be necessary, or who wish to gain tax-efficient equity participation in their employer’s company.  Start-up/growth companies may also consider this new category of employee to be a significant tool to recruit, reward and retain key personnel as the shares issued may result in a greater percentage share of the employer business given the likelihood that these companies will have a smaller value of issued capital.

It is of course still early days but so far there is little evidence to suggest that the scheme has been embraced by the business community. So far, it appears to have been used largely to benefit executives in reducing their tax bills by participating in private equity transactions.  Before the scheme was introduced, the Institute for Fiscal Studies warned that it would likely encourage new tax avoidance practices. The Government has confirmed that it will continue to monitor the scheme to ensure it is used appropriately.

The framework for creating employee shareholders is highly prescriptive and employers and employees should each seek specialist advice before entering into the process.

For more information please contact Martin Sinclair or Nicola Gray or call on 01224 632 464.

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