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Employment Update: Owners, workers and the taxman

Mark Gearing


United Kingdom

Employment Update: Owners, workers and the taxman - all in it together through deregulation and a tax break?

The Chancellor of the Exchequer George Osborne has today announced plans for a new ‘owner-employee contract’.

The press release from HM Treasury explains that new owner-employees will exchange key UK employment protections for rights of ownership in the form of shares in the business they work for, any gains on which will be exempt from capital gains tax. Companies of any size will be able to use this new kind of contract, but it is principally intended for fast growing small and medium sized companies that want to create a flexible workforce.

Under the new type of contract, employees will receive between £2,000 and £50,000 of shares that are exempt from capital gains tax.  In exchange, they will give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training, and will be required to provide 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual eight.

Interestingly, Osborne has described this as a ‘voluntary three way deal’, with the company giving employees shares in the business; the employee replacing their employment rights with new rights of ownership and the Government charging no capital gains tax.

But how voluntary will this be? HM Treasury states that owner-employee status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires. This therefore potentially enables unscrupulous employers to restrict a new hire’s employment rights in exchange for no more than £2,000.  The Guardian has reported that Adrian Beecroft, the venture capitalist who had proposed the introduction of the concept of ‘Compensated No Fault Dismissals’, has (perhaps unsurprisingly) endorsed Osborne’s proposal.

Legislation to bring in the new owner-employee contract will come later this year so that companies can use the new type of contract from April 2013. The Government plans to consult on the details of the contract this month.  

The proposal does look to fill part of the gap in the capital gains tax treatment for employee shareholders – between those who benefit from exemption from capital gains tax through using annual exemptions (or an HM Revenue & Customs approved share incentive plan), and those that pay capital gains tax at 10% because they are eligible for entrepreneurs’ relief.  However, we can expect some strong views from employee representative groups, who may well consider the proposal amounts to a cut-price sale of employment rights.


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