HM Treasury and the Department for Business, Innovation and Skills have announced plans for an "owner-employee" contract for UK employees.

The new owner-employee contract is part of the government's drive to promote employee ownership so that it plays a bigger part in the economy.  Future announcements with respect to the promotion of employee ownership are expected when the government responds in full to the Nuttall review of Employee Ownership that it has set up.

The proposed contract

The proposal is that employees give up some of their employment rights in exchange for shares in the company for which they work. The government has said that these 'employee-owners' will be exempt from capital gains tax on any subsequent disposal of these shares.

Under the proposed new rules, employees may acquire shares with a market value of between £2,000 and £50,000 as at the date of acquisition, that will thereafter be exempt from capital gains tax. In exchange, employees will give up their rights in relation to unfair dismissal, redundancy, the right to request flexible working and time off for training, and will be required to provide 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual 8.

Tax implications

The announcements concentrate on the capital gains tax position of employees on the sale of their shares.  Employees are already able to benefit from a personal annual exemption from capital gains of (currently) £10,600 per year. The proposals do not appear to affect the income tax and national insurance position on acquisition of the shares. However, employee-owners receiving full capital gains tax relief on the shares awarded will still be eligible to participate in existing employee share ownership schemes such as the Enterprise Management Incentive scheme.

Companies which can use the contract

The new type of contract is principally intended for small and medium-sized businesses, although companies of any size can choose to participate in the scheme. The scheme will be optional for existing employees but companies can choose to offer only owner-employee contracts to their new hires.

It will be interesting to see, when the new legislation is published, if the new contracts can be used as a tax-efficient way to structure management incentive schemes for UK resident managers on buy-outs.

Future development

Draft legislation relating to the new owner-employee contract is expected to be published later this year so that companies can use the new type of contract from April 2013. As yet, the details of the contract are not known. The government will consult on details of the contract later this month.

For the official announcement, please click HERE.