UPDATE: Government consultation on employee ownership and share buy backs

UPDATE: Government consultation on employee ownership and share buy backs

Published:

Author: Nina Smith

The BIS report on the Nuttall Review of Employee Ownership was published in July 2012.

We reported in August (click here) on these findings.

BIS has now completed the next stage in its implementation programme. It has carried out a consultation (which closed in November 2012) on the recommendations set out in the Nuttall Review.

Simplifying share buy backs

The consultation paper sought views on changes to the conditions under which a company can authorise and finance the repurchase of its own shares, and hold them once repurchased. This is part of the wider drive to promote a new 'employee owner' business model.

Key proposals include:

  • allowing the contract for an off-market buy back of shares to be authorised by ordinary resolution (as opposed to the existing special resolution)
  • enabling companies to pay the purchase price for a buy back of shares purchased for or pursuant to an employee share scheme in instalments (payment must currently be made in full on purchase)
  • increasing the funding options available to finance a share buy back, including by revisiting the restrictions on paying for buy backs out of capital
  • allowing private companies to hold bought-back shares in treasury (rather than cancelling them), as listed companies are able to do

The aim is to reduce the administrative burden on companies to buy back shares from those employees leaving the company and redistribute to the new, thus making this new business model more attractive to companies.

Tax benefits and employment rights

A separate consultation paper on implementing employee owner status proposed that employees might be offered shares with certain tax advantages in exchange for giving up certain employment rights. This would bring the employee into a new category of 'employee owner'.

Interested businesses could offer new or existing employees between £2,000 and £50,000 of shares free from capital gains tax (CGT) on gains made on any subsequent sale of the shares. There is no suggestion that employee will have to pay cash for the shares, nor indication whether the relinquished employment rights will be counted as consideration.

The suggested employment rights given up as an 'employee owner' are:
. unfair dismissal (except where this is automatically unfair or relates to anti discrimination law)
. statutory redundancy pay
. request for flexible working
. request for time off for training

Despite the apparent benefit of acquiring shares free from CGT, the consultation paper confirms that the normal rules for income tax and national insurance contributions will apply to shares acquired. Employee owner shares will also not be eligible for the Enterprise Investment Scheme (although further consultation on this issue is awaited).

Comment

Employee ownership proposals are still at an early stage, although the intention is to operate employee owner status from April 2013. Consideration of the tax treatment and operational cost of share buy backs will be fundamental in evaluating the overall financial viability of the regime against the benefit of forfeited employment claims.