The Government has announced a new tax-effective regime under which employees can give up certain employment rights in return for shares which are exempt from tax on sale.

At first glance, this looks like it could be particularly attractive to many companies in the tech sector which are keen to offer equity to new joiners, but reluctant to increase employee numbers. This reluctance might be due to the risk, cost, time and 'red-tape' associated with some aspects of employment law.

How will it work in practice?

As yet we don't have much detail, but it looks likely the scheme will work as follows:

  • Employees (so-called 'employee-owners') may be offered between £2,000 and £50,000 of shares in their employing company.
  • Any gain made on the sale of those shares will be tax free.
  • In return for those shares, the 'employee-owners' will: give up their UK rights on unfair dismissal, redundancy, and the right to request flexible working and time off for training; and
  • be required provide 16-weeks' notice of a firm date of return from maternity leave, instead of the usual eight.
  • Employee-owner status will be optional for existing employees. However, both established companies and new start-ups can choose to offer only this new type of contract for new hires.
  • Companies of any size will be able to use this new kind of contract.

Next steps

Legislation to bring in the new employee-owner contract will come later this year so that companies can use the new type of contract from April 2013.

In the meantime, the Government will consult on some of the contract details later this month.

So, if you were thinking of offering some form of equity participation to your employees, we'd suggest you delay your plans until the Government issues more details next month.

As soon as this arrives, we will be contacting you for your views on the detailed proposal - and we'll be happy to feed those views into our response to the consultation.