George Osborne accused of opening tax loophole with ‘shares for rights’

19 Oct

George Osborne has been accused of opening up new tax avoidance opportunities after it emerged companies will be allowed to give back employment rights to selected workers who receive tax-free shares under his shares-for-rights scheme.

The loophole could be used to reward high-paid staff with tax-exempt shares worth up to £50,000 without loss of access to fair dismissal procedures, redundancy pay and other “gold-plated” employment rights.

The shares can be added to any held in other tax-free employee schemes, creating a “pure tax advantage” for the better off rather than simply a means of reducing rights, according to one accountant. Another said it opens up “lots of tax abuse opportunities, including contractual abuse”.

The scheme, trumpeted at the Conservative conference as an “all in it together” benefit for employees, could allow big tax avoidance opportunities to some but they will be worthless to most ordinary workers – likely to get only the minimum £2,000 in shares.

New workers can be forced to accept the “employee-owner” scheme in those companies that operate it. But the Treasury has acknowledged that employers can return equivalent rights to individuals on a selective basis through their personal contracts.

A Treasury announcement said: “Companies recruiting employee-owners will continue to have the option of inserting more generous employment conditions into the employment contract if they want to.” They will be able to pick and choose who they give enhanced rights to. The Treasury said there would be nothing to stop an employer putting all employees in the scheme and returning rights to only some of them, or only putting some employees into it, though final details had not been worked out.

The TUC said it looked as if “the potential for misuse of the scheme could be significant”.

David Ellis, head of the reward practice at accountants KPMG, said firms might use the scheme for the “pure tax advantage” since shares were known to increase staff performance. “If there’s a tax efficient way to give employees equity, you will use it even if you don’t want to take away employment rights.” Given the tax advantage would only accrue to those with high-value shares over a period of years “that pushes it down a certain avenue about who to offer this to”.

Richard Murphy, director of Tax Research UK, said: “There are lots of tax abuse opportunities, including contractual abuse, which accountants will want to exploit. Give them any opportunity and they will take it.”

But the tax concession is of little or no benefit to the ordinary worker with a small number of shares since the gains would be extremely unlikely to be more than the £10,600 annual capital gains tax (CGT) exemption individuals get anyway. CGT applies to profits from selling property and ranges from 18% for those on low-income tax bands to 28% for well-paid people.

Those given shares in startup companies that become successful could make big tax-free gains. Core workers starting a firm could be given a nominal share issue representing the whole capital of the new company and waive their employment rights. Such shares can multiply many times in successful firms. “If I did this, I would never have to pay capital gains tax on the sale of the company,” said Murphy.

“This is not really very useful to the average person. In a startup they are more likely to need their redundancy rights than shares in the company. It’s a nonsense. There are better employee share schemes. They are never going to get the CGT exemption.”

He was sceptical that Osborne could get the scheme up and running by his deadline of April next year. “There are going to have to be massive restrictions if this is not going to be subject to enormous abuse. It’s going to be deeply complex with a lot of consultation and it is going to be a nightmare.”

The shares could be in addition to existing employee share ownership schemes such as the Enterprise Management Incentive with its £250,000 tax-efficient allowance, introduced to help small and medium-sized enterprises to recruit and retain high-calibre employees.

The TUC said: “If the chancellor’s shares for rights idea does become a reality, it also looks like the potential for misuse of the scheme could be significant. If employees who are already paid in shares are now simply able to pay less tax on them, the main impact will be a loss in vital revenues to the Exchequer.”

The scheme is being overseen by the business department, which said: “A consultation will be launched shortly setting out more detail on how this proposal will work in practice.”

Expensive option
The statutory law on unfair dismissal and redundancy allows for strict procedures before an employee can be sacked. These are the procedures Osborne wants to allow firms to avoid in order to increase labour flexibility. If they are written back into some workers’ contracts, the remedy for breach will be common law wrongful dismissal rather than statutory unfair dismissal. The employee would sue in a county court or at the high court (depending on the level of damages sought) rather than take an employment tribunal case.

This option is potentially much more expensive, particularly for the losing side, so firms will not allow it to most of their workers. For a successful employee, damages for wrongful dismissal are not capped as under statutory unfair dismissal, which is limited to £12,900 plus a potential £72,000 compensatory award. In 2010-11 the median award was only £4,591.

Tribunal awards are higher for sex and disability discrimination, but Osborne’s scheme cannot exclude such claims because of EU law.

Nor are tribunal claims for dismissal over whistleblowing, union membership or raising health and safety issues excluded under the scheme. The rights affected are basic unfair dismissal, redundancy, including statutory payments, and the right to ask for flexible working. Increased notice will be required from women returning from maternity leave – 16 weeks instead of eight.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: