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Business department consults on employee owner shares

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Employees taken on as ‘employee owners’, under plans announced by the chancellor at the recent Conservative party conference, will forgo unfair dismissal rights (with some exceptions), rights to redundancy pay, certain statutory rights to request training, and the statutory right to request flexible working in return for a new capital gains tax exemption. The plans have been criticised by tax experts and others, who have pointed that most workers are already entitled to an annual CGT exemption of £10,600.

‘If the scheme is to have legs, employees need more meaningful tax breaks,’ said Kate Burgess, small companies correspondent at the Financial Times.

Employee owners will be given shares in the company to the value of between £2,000 and £50,000, the Department for Business, Innovation and Skills (BIS) said as it released a consultation document on Thursday. Any increase in value of these shares will not be chargeable to capital gains tax.

The shares will be valued ‘according to their unrestricted market value at the time that they are awarded’ for the purpose of the £2,000 and £50,000 limits. The government is aware that valuing company shares ‘may present difficulties in certain cases, particularly for unquoted companies’, the consultation document said.

The consultation, which closes on 8 November, focuses on employment law and company law issues. HM Treasury will consult separately on tax issues, with a view to introducing the CGT exemption in Finance Bill 2013.

However, the BIS consultation document included questions on some tax aspects and confirmed that ‘employee owner’ shares will be subject to income tax and NICS under the normal rules applying to shares acquired by reason of employment.

‘The government expects that the shares will not be eligible for the Enterprise Incentive Scheme (EIS), or any tax-advantaged employee share scheme,’ BIS said.

It added: ‘At present, the government intends that corporation tax relief for employee share acquisitions will apply in the normal way where appropriate. The government also intends that the normal stamp duty rules will apply, and stamp duty will not be payable on the issue of new shares to the employee. However, stamp duty will payable where shares are sold on at the normal rate of 0.5%.’

The Guardian noted that the tax concession would be ‘of little or no benefit to the ordinary worker with a small number of shares since the gains would be extremely unlikely to be more than the £10,600 annual CGT exemption individuals get anyway’. It quoted David Ellis, head of KPMG’s UK reward practice, as saying that, given that the CGT advantage would only accrue to those with high-value shares over a period of years, ‘that pushes it down a certain avenue about who to offer this to’.