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The government is to introduce a scheme whereby employees may exchange certain employment rights for shares in their employer company. LITRG believes this plan is misguided, particularly for lower-paid employees.

Introduction

Following a short consultation run by the Department for Business, Innovation and Skills in October and early November (the proposals being set out on the department's website), the Chancellor has confirmed that the government will be introducing a new ‘employee-owner status’ for workers choosing to trade certain employment rights for shares in their employer company. Those shares will be exempt from capital gains tax (CGT) but may still result in an immediate income tax and NIC liability.

Complexity, tax liabilities and risk

There are risks that the scheme will be over-complex, still create tax liabilities and put employees at risk for little or no real reward. There is also a risk of confusion with existing employee share schemes: elsewhere in the Autumn Statement the Chancellor gave welcome confirmation that a number of improvements to the SAYE and other schemes are to go ahead.

The Low Incomes Tax Reform Group, in its response to the consultation on this measure, said that it encouraged employees to relinquish rights which were certain and set out in law in return for an uncertain gain in a speculative investment. It was crucial that employees fully understood the consequences and risks of their choice, but in many instances they were unlikely to do so and might actually be pressurised into these arrangements.

Benefit of shares free of CGT?

Although the main supposed benefit of the scheme is that the shares offered in the employing company will be free of capital gains tax, for many low-income workers the trade-off of certain rights will not be worthwhile because most people never use their CGT annual exemption in any event. LITRG is pleased to see that the Chancellor has committed to looking at the income tax and NIC status of these shares. The group feels this is a much more important issue: awards to ordinary employees need to be free of income tax and NICs.

LITRG’s full response to the earlier consultation on employee-owner status can be read on the group’s website.