David Pett, partner at Pett Franklin, a multi-disciplinary professional practice, says a number of important issues need to be addressed if the Chancellor’s proposal for companies to issue shares in exchange for employees giving up employment rights are to work.

New and existing employees of any size of company may be “given” between £2,000 and £50,000 of shares “that are exempt from CGT”.  A consultation exercise will be initiated this month, with legislation being published later this year to allow “the new type of employee-owner contract” to be used from April 2013.

Mr Pett said the Chancellor made no mention of any exemption from income tax.   He asked: “Will the employee still be charged income tax and NICs on the initial value of the shares?   If so, thought must be given to how the tax will be funded.  If the shares are ‘readily convertible assets’, then the tax will be due under PAYE, and attract NICs.

“How will the shares be valued?   If the normal bases of valuation are used, the shares may be of relatively small value allowing relatively large holdings in smaller ‘start-up’ companies to be acquired at a low initial cost.  In effect, this would appear to be a means of extending the EIS scheme to employees who are not directors – but without the up-front relief from income tax.

“There must, presumably, be restrictions upon the type of shares to be used.  It would otherwise be all too easy to offer a form of “growth share” which would allow the employee to secure disproportionate growth in value with full CGT relief”.

Mr Pett cited many more issues and added: “As can be seen from this handful of initial comments, to become a workable arrangement, which does not allow for misuse or abuse, will require much thought and engagement with all interested parties”. 

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