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Tax incentives and employment rights have changed. Find out how.

The new employment status is now in place. It is now possible to offer or accept a job on an employee shareholder basis that is different from jobs offered on other employment contracts, as long as both the employer and employee agree to certain actions.

Tax incentives and employment rights have been amended to create this new status. The employee shareholder will be awarded at least £2,000 of shares in their employer or its parent company. The Finance Act 2013 provides tax reliefs for employee shareholders:

  • income tax and NICs will usually not be chargeable on the first £2,000 of share value received by an employee shareholder
  • there will usually be CGT exemption for £50,000 of shares received by an employee shareholder
  • when an employer funds the costs of the independent legal advice received by a person considering an employee shareholder offer, this will not usually be a taxable benefit.

Employees will not have certain employment rights. These are:

  • unfair dismissal rights (apart from the automatically unfair reasons, where dismissal is based on discriminatory grounds and in relation to health and safety)
  • rights to statutory redundancy pay
  • the statutory right to request flexible working except in the two week period after a return from parental leave
  • certain statutory rights to request time off to train
  • an employee shareholder will have to give 16 weeks’ notice to their employer if they intend to return early from maternity, additional paternity or adoption leave.

There are six mandatory conditions that apply. These are:

  • the individual and the company must both agree that the individual will be an employee shareholder
  • the employer must give the individual fully paid up shares in the employer’s company or employer’s parent company, and they must be worth at least £2,000
  • the individual must not pay for the shares in any way
  • the employer must give the individual a written statement of the particulars of the status of employee shareholder
  • the individual must obtain advice from a relevant independent adviser on the terms and effect of the written statement. The company is required to pay for that advice whether the individual accepts the job or not
  • the individual cannot accept or agree to an employee shareholder job until seven days have passed following receipt of the advice. The seven days commence on the day after the advice has been received. 

The guidance issued on GOV.UK also details what must be included in the written statement. In addition to details of employment rights the statement also requires details of shares being offered including rights to income or distributions, rights on winding-up, pre-emption rights, redemption rights, any restrictions on transfer and ‘any other information that may be relevant or useful for the individual to know’. GOV.UK also provides guidance for employers who are considering whether employee shareholder status would work for their business.

HMRC’s guidance explains that ‘income tax and NICs is not usually chargeable on the first £2,000 of share value received by an employee shareholder. This is because the employee shareholder is deemed to have made a payment of £2,000 for the shares. The normal rules for the taxation of employment-related securities apply to any value received in excess of £2,000.’ It goes on to explain that it only applies on accepting the new status and that it doesn’t apply to those who have a ‘material interest’ in the company.

HMRC also states that a capital gains tax exemption is available on the disposal of up to £50,000 worth of shares received by the employee shareholder. It is highlighted that this is also subject to the employee shareholder not having a ‘material interest’.

HMRC’s guidance also looks at valuation of employee shareholder shares, reporting requirements for employee shareholder shares (Form 42) and states that the costs will be, subject to certain conditions, eligible as expenditure to reduce corporation tax.

Further details are available on ACCA’s Technical Advisory webpages.

A new employment law Technical Factsheet on ‘employment status’ will be available soon. It is part of the suite of employment law factsheets that are revised every six months to reflect changes in legislation and recent case law. The factsheets include model contracts of employment.

Article contributed by ACCA