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George Osborne’s shares-for-rights plan: new tax avoidance scheme for the rich

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UK Chancellor George Osborne’s employee “shares-for-rights” plan will have sent tax accountants scuttling to their calculators to assess just how big a windfall this will be for the rich.

Never mind the offer of a couple of thousand quid’s worth of shares to ordinary workers in exchange for surrendering rights on unfair dismissal, redundancy, flexible working, time off for training and maternity. Look instead at the £50,000 maximum for this share disbursement – free of capital gains tax (CGT) when they are sold.

Alrich is not privy to the envelope, upon the reverse of which Osborne’s plans are doubtless minutely detailed, but it seems unlikely that any company will hand out £50,000 to any shopfloor workers. However, the sum in free shares could provide a rather nice golden hello for their highly valued workers – the ones they already pay well and incentivise with bonuses, nice pensions and comfortable contractual conditions.

These people probably wouldn’t be seen dead in an employment tribunal anyway and will not think twice about abandoning their rather pitiful statutory employment rights. For unfair dismissal the maximum stands at 30 times a week’s pay (up to £430 a week so a maximum of £12,900) plus a potential £72,000 compensatory award. Not bad for ordinary folk perhaps – but ordinary folk don’t get anywhere near that much in general. The median award for unfair dismissal last year was a mere £4,591.

So high value workers will see no great loss in giving up their rights, not least because they are likely to have made-to-measure contracts offering far superior terms and conditions. Assuming they forgo statutory rights, they will be able to fall back on their contractual rights, including wrongful dismissal. A Treasury announcement of the plan confirms: “Companies recruiting employee-owners will continue to have the option of inserting more generous employment conditions into the employment contract if they want to.”

‘At common law a master is not bound to hear his servant before he dismisses him. He can act unreasonably or capriciously if he so chooses but the dismissal is valid. The servant has no remedy unless the dismissal is in breach of contract and then the servant’s only remedy is damages for breach of contract – Lord Reid

Wrongful dismissal means dismissal contrary to the contract and hence provides dismissal protection limited to the contract. This may mean simply notice or pay in lieu. Crucially there is no basic legal requirement for a company to go through a proper dismissal procedure (as there is with statutory unfair dismissal): “At common law a master is not bound to hear his servant before he dismisses him”, in the quaint words of Lord Reid (Malloch v Aberdeen Corporation 1971).

Not, that is, unless the contract specifies that the master should hear his servant. It would be perfectly possible for a company seeking to attract high value workers to offer them the shares to opt out of statutory employment rights but then give them equally good contractual rights.

These terms would be actionable, albeit expensively, in the courts and any breach could be deemed wrongful dismissal. The damages for that are potentially much bigger than for unfair dismissal, including lost earnings and the lost future benefits of remaining with the firm. Among those future benefits, of course, would have been the continued holding and growth in the £50,000 of tax-free shares.

The point for these individuals, however, is less about how far they are protected from dismissal than the enhanced benefits they get as a result of their privileged employment position. And thanks to George Osborne, those benefits may have got a whole lot better. 

Twitter: alrich0660

Notes and queries
It is uncertain how the Osborne scheme is meant to work or even where the shares to operate it will come from. Companies can’t just print shares at will since they are supposed to represent the value of the company. Other shareholders would be aggrieved at the dilution of their holding if new shares were handed out willy-nilly to workers. Shares have to be sold for value.

There is already a scheme with tax-free elements which may be the model Osborne is looking at, the Share Incentive Plan. However these in effect constitute a form of pay rather than a lump sum “free” offering. Pay As You Earn tax obligations apply if the shares aren’t held for at least five years.

The Osborne shares raise all sorts of complex tax issues. If they are indeed “free”, will they be treated as pay, subject to income tax, albeit pay that can’t be taken until the individual leaves his job and cashes them in? The element free of CGT will presumably only be the enhanced value since the holder was given the shares, which could be very little – or less than nothing.

How long will the workers be obliged to hold the shares until they can truly call them their own? It must be a reasonable period of years otherwise there’s an incentive to resign early and keep the free money. But if there is a minimum, isn’t that also an incentive for the firm to sack workers just before the shares are vested in them?

Tax implications: SIPs
This is what the SIPs rules say about those leaving their workplace shares plan. It may or may not give clues about how the new Osborne shares will be treated:

Shares cease to be subject to the plan when participants stop working for the company operating the plan (or group operating the plan, if it is a group plan). The tax implications when the shares cease to be subject to the plan depend on the circumstances of their withdrawal.

The general rule is that there is no income tax or NICs to pay when the shares cease to be subject to the plan, provided they have been held in the plan for the full five years required by the legislation. Different amounts may be taxed if the shares have been held for a shorter period.

There is generally no liability to income tax or NICS on shares withdrawn from a plan when a participant ceases employment with the company as an involuntary leaver, due to:
TUPE transfer
change in control of the subsidiary employing company
retirement on or after the age specified in the plan

About alrich

Journalist and blogger on legal and financial/economics issues

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