Tax results of ‘shares for rights’
Written by Ray Coman
At the Tory party conference yesterday, George Osborne announced that employees would be able to forego their employment rights in exchange for shares in their company. Under the plans, company owners would be able to grant their employees shares with a value of between £2,000 and £50,000, which would be exempt from capital gains tax when sold.
Where a worker changes status from being employee, the national insurance savings for both employee and employer can be significant. Under the rates applied for the year to 5 April 2013, national insurance for employees on earnings between £7,592 and £42,484 is 12%, and 13.8% for employers on earnings over £7,488.
To put an example to the tax savings, by becoming a shareholder an employee earning £45,000 would save £4,237.36 per year, and would save the employer £5,176.66 in national insurance. The net tax savings for employers would be £4,141.33, where the typical rate of corporation tax for most companies with a profit less than £300,000 is 20%. As a practical consideration, the individual would save income tax, in more or less equal proportion to the extra corporation tax for the employer. To prevent being out of pocket to the employee, gross pay should be reduced to reflect the increase in take home amounts. The result still being a win for both sides on national insurance saved.
In principal, it has previously been possible for an employee to become a company shareholder, and achieve the tax savings outlined above. Under the announced plans, however, the capital gains tax exemption however could result in significant further savings for workers giving up their employment rights. Hence the, “workers of the world unite” avowal made from the chancellor. The famous slogan, borrowed from Karl Marx, was seemingly a retort to Labour for claiming to be ‘One Nation’ in their conference, an idea borrowed from the conservative Benjamin Disraeli.
While the national insurance savings are immediately in evidence, the potential for capital gains tax savings is far less so. Put into practice, an employee is not likely to regard the shares as an incentive where there is no apparent market for them. On the other hand, any obligation on the employers’ part to buy the shares back would introduce a potential £50,000 deterrent to bringing in the initiative.
These shortcomings raise a question mark over whether the plans would emerge from the consultation in their announced form, or whether they would be widely adopted in practice. Nonetheless, it is easy to interpret the proposal as signalling the government’s willingness to assist the small business sector with the burden of tax, employment law and related costs.
The essence of the planned scheme has the potential to be beneficial for all business, but particularly in the private owned sector, where business owners could have more influence over both management and ownership. The proposal idea could result in a much needed confidence boost to the sector where it is hard to imagine how hiring costs could not be impeding growth.
In view of the obvious shortcomings, it is not easy to predict the precise workings of any resulting laws. However the tax profession is typically prompt in its response to any significant change to the rules. For more information on tax implications of your employment plans please contact us for an initial meeting.