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Owners, workers and the taxman – all in it together through deregulation and a tax break?

The Chancellor of the Exchequer George Osborne has announced plans for a new ‘owner-employee contract’.The press release from HM Treasury explains that new owner-employees will exchange key UK The Chancellor of the Exchequer George Osborne has 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. Reaction from the Employee Ownership Association can be seen here. The London Evening Standard has also reported on the proposals here.

This latest measure shows the Government’s continuing and developing interest in promoting employee ownership. This particular measure promotes employee share ownership directly by employees.  It should be considered as part of a larger employee ownership policy agenda within Government.

The Nuttall Review, written by me, contained broad ranging recommendations to the Government on what is needed to drive employee ownership, in all its forms, into the mainstream of the UK economy. The Nuttall Review set out 28 recommendations and the Government responded immediately on 4 July 2012 to support three key measures.  In his keynote speech at the launch of the Nuttall Review, “Responding to Nuttall – Next Steps to a John Lewis Economy”, the Deputy Prime Minister, Nick Clegg summed up these measures as:

• a new Institute to fly the flag;

• empowering staff to get Employee Ownership into the mainstream; and

• off the shelf templates to make it easy.

An article by Graeme Nuttall in Company Secretary’s Review explains more about these three immediate steps.

The Government is committed to providing its full response to the Nuttall Review this Autumn.  HM Treasury is also making good progress with its review to examine the role of employee ownership in supporting growth, and the options to remove barriers, including tax, to its wider take up (as announced in Budget 2012).  HM Treasury is working with the team at the Department for Business Innovation and Skills, that supported the Nuttall Review, and with HM Revenue and Customs, and will conclude its review ahead of the Autumn Statement 2012.

The Cabinet Office continues to promote public sector mutuals and has plans to set up a Mutuals Ambassadors Programme designed to drive forward the creation and growth of mutuals.There are related developments at the Post Office and a commitment to employee ownership in Royal Mail.

All these initiatives together mean employee ownership has an unprecedented, all time high profile, in the UK. Employers and employees wanting to know more about employee ownership should read the Nuttall Review.


Article: Wait before judging owner-employee proposals, says expert 

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