The Government’s controversial ‘shares for rights’ scheme is introduced this April, following a consultation period amongst over 200 businesses, groups and other interested parties. Interestingly, the scheme – more formally known as ‘employee-owner’ – has been largely rejected by businesses and derided in the media.
How the scheme works
Employees exchange statutory employment rights in return for shares in the company, which are exempt from capital gains tax (CGT). The amount they can receive varies between £2,000 and £50,000 worth of shares. Those with ‘employee-owner’ status will have no rights on unfair dismissal, flexible working, redundancy pay and training leave. Notice required for employees returning from maternity leave will increase from eight to 16 weeks.
Current employees will be unaffected – unless they volunteer to participate – however, companies could decide to implement only this type of contract for all new employees going forward. Businesses also have the freedom to ‘sweeten the deal’ with extra, more generous employment conditions, should they feel so inclined.
One of the main criticisms is the suggestion that the scheme is a means of raising last year’s ‘fire at will’ (dismissal of employees without cause) proposals in another guise. In addition to this, employers aren’t obligated to give voting rights with the shares and, in the majority of cases, CGT relief won’t be relevant, as most employees will be well within the annual CGT exemption threshold of £10,600.
There are circumstances where employee shareholders could be an inconvenience to a practice, particularly if the business was to be sold. Also, recruitment may have less ‘red tape’ attached, but fewer people are likely to apply for roles if they come with compulsory ‘employee-owner’ status, inevitably reducing the range and quality of candidates on offer.
A £2,000 stake could be viewed as a trivial cost compared to the longer term benefits of recruiting staff with greatly reduced employment rights. Moreover, the ‘shares for rights’ scheme offers a substantial financial incentive for employees with more seniority in the company. These individuals could be given the full £50,000 worth of shares and benefit from CGT immunity, which is very appealing given the higher CGT rate is 28%. And of course there is nothing to prevent them being given back all employment rights later on.
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