Insights

At the start of the year the Government announced the introduction of a new style of employment contract, the employee shareholder contract, which we blogged about in a previous issue (link to original). By entering into this type of contract an employee is able to forfeit certain legal rights in return for company shares. This initiative is potentially fraught with problems and has been criticised for its removal of what are arguably fundamental rights of every employee. And employee ownership will not suit every company; the long term implications of having your employees as shareholders needs careful thought.

In spite of the criticisms, the Government, keen to encourage company participation for employees, wants to see more ‘John Lewis’ style businesses and is keen to offer tax breaks as an incentive. The fact that employee participation in company growth can work well is evidenced by John Lewis’s financial results, which speak for themselves.

Business is booming at John Lewis

At a time when many retailers are going into administration, John Lewis announced a 9.1% boost in its sales to £8.47bn, with profits up 15.8% to £410m this year. For staff, this has meant a handy 17% bonus payout. Independent research also highlights numerous macro economic benefits when employees co-own a company. These include higher levels of job creation and job security, and much greater staff commitment levels than can be accredited purely to financial reward.

£50m fund to help pay for employee shareholder tax relief

To further expand on this opportunity and with the aim of strengthening the nation’s economic prospects, the Government has recently launched a consultation process – ‘Supporting the employee ownership sector’. Over the coming months it will invite reaction to proposals for two additional forms of tax relief. The Government has also pledged to provide £50million to help entrepreneurs introduce new forms of employee ownership within their existing business entities. The proposed changes differ from the employee shareholder scheme mentioned above because they do not require a reduction in the legal rights of employees in return.

1) Capital gains tax relief for exiting business owners

Designed to encourage entrepreneurs to start companies and sell them to employees, this will offer attractive tax relief opportunities if existing staff are favoured as buyers rather than external candidates.  It is actually a very logical idea because this approach reduces the risks to employees, some of whom may find themselves unemployed if external buyers decide to ‘restructure’ their acquisition to cut costs following a purchase. An existing team of staff is less likely to do this and is more likely to continue running the operation as previously under the original shareholder(s).

2) Staff bonus tax relief

A second proposal is for staff bonuses up to a certain value to be paid free of income tax and national insurance. This treatment would be available to employees and directors who are also shareholders of the company. Consultation proposals state that this is intended to be available to any company meeting certain qualifying conditions, not just to those where a previous owner was able to claim capital gains tax relief for a qualifying disposal of a controlling interest. This proposal is intended for cash payments and not for shareholdings, so it will not replace existing tax efficient employee share schemes.

Both employers and employees will benefit from this if it is introduced; employers will pay lower amounts of employers’ national insurance contributions (NICs) and employees will pay less income tax and NICs.

To learn more about the Government’s current consultation programme, you can access the official document here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210661/supporting_employee_ownership_sector.pdf

If you would like to discuss whether employee ownership is appropriate for your company, or wish to review options available for implementing tax efficient employee share schemes, for example the enterprise management initiative (EMI), please contact Lesley Stalker by emailing las@rjp.co.uk.