Posted by James Pearson on 09 Oct 2012

Employee-Owner Contracts

The Chancellor of the Exchequer, George Osborne has recently announced proposals for a new form of employment contract, known as employee-owner contracts, with reduced employment rights for employees.

Reduced Employment Rights for Employees

In exchange for surrendering protection from unfair dismissal, redundancy and time off for training amongst other things, employees will be given shares in their employer company of between £2,000 and £50,000. These shares will be exempt from capital gains tax meaning that any increase in the value of the shares will be tax-free. HMRC have confirmed that there will be an income tax and national insurance charge on the employee in relation to their initial receipt of these shares.

Once the law is in place, employers will be able to change existing contracts into owner-employee relationships with employee consent but will be able to hire new employees on this basis from the outset.

Details of the measure are yet to be confirmed, and it may be that the proposals conflict with EU law, but assuming this obstacle is overcome it is anticipated that these new contracts will be available for use from April 2013.

Obviously, choosing to move to an owner-employee contract represents something of a gamble as the time when employment rights are most required is likely to be at the time when the shares those rights have been surrendered in exchange for are falling in value. However, this could be an exciting opportunity for companies to motivate staff tax efficiently without having to negotiate the minefield of legislation surrounding share incentive schemes.  If the proposals are thought out carefully with sufficient flexibility, they ought to add a positive dimension to entrepreneurial development.

If you are considering share incentive schemes as part of an employee incentive arrangement, please call us to talk through the options.

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If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com.