Employee shareholders are awarded fully paid up shares in the employer’s company worth at least £2,000, in return for giving up various employment rights including unfair dismissal rights, statutory redundancy pay and the statutory right to request training and flexible working. There is a complete capital gains tax exemption on the first £50,000 worth of shares, and no tax or national insurance is payable on the first £2,000.
The new status has been hugely controversial from the outset. The majority of those who responded to the initial consultation on the proposals expressed concerns about it complexity and workability. The House of Lords also rejected the employee shareholder proposals on their first reading, following concerns that they would have a damaging effect on employment relationships and that unscrupulous employers might take advantage.
The government has sought to address at least some of these concerns. There is now an obligation upon employers to provide prospective employee shareholders with detailed information on their rights, to ensure that independent legal advice is offered, and to meet the costs for that.
The new rules also state that when determining whether shares meet the minimum limit for employee shareholder status (£2,000), the valuation should be the actual market value taking into account any restrictions. For the purposes of the upper limit (£50,000), the unrestricted market value, without taking into account any restrictions over the shares, should be used. Employers can apply to HMRC for a valuation check before creating any employee shareholder shares. HMRC has produced a guidance note providing further clarity on the share valuation process.
This novel new status is very different from mainstream employee ownership models, which support rather than remove employee rights. There is good evidence that such models promote enhanced employee engagement and business success. The jury is still very much out on employee shareholders. Certainly, the new status will not suit every business model (nor indeed many employees), but there may be certain companies which find it attractive, perhaps particularly those at the start up stage.
If you would like to learn more about employee shareholder status, please contact James Warren