By Daniel Hunter

Proposals for radical new owner-employee contracts announced this week by the Chancellor of the Exchequer risk being scrapped before they are off the ground, warns accountants and business advisers James Cowper.

Under proposals that may be introduced as early as April 2013, new staff will surrender their employment rights on unfair dismissal, redundancy, the right to request flexible working and time off for training in exchange for shares in the business they work for.

The new contracts will be optional for existing employees, but companies will be able to choose to offer only this new type of contract for new hires. Companies recruiting owner-employees will be able to include more generous employment conditions in the employment contract if they wish. Any gains on the shares in the business under the new initiative will be exempt from capital gains tax, and owner-employees will still be eligible for existing share ownership schemes, such as the Enterprise Management Incentive.

“You have to ask whether this is another example of the Chancellor of the Exchequer making up a tax policy on the hoof that will be subsequently abolished or changed significantly to make it fit for purpose when legislation for these new contracts is announced later this year," Chris Lee, a Business Tax partner in James Cowper’s Reading office, said.

“The proposals beg a large number of questions. Take as an example a recently formed company that recruits someone and gives her shares in exchange for her giving up employment rights. Three years later the company has developed some really valuable IP but still hasn’t got any money.

"She hands in her notice and goes to work for the main competitor, leaving her previous employer in a position of having to raise money to somehow buy her shares at the reasonable price envisaged by the Chancellor. Of course, if they hadn’t gone for Mr Osborne’s new scheme, it wouldn’t have cost them a penny, at least not unless she had managed to argue constructive dismissal or similar.

“It’s an interesting idea, but like the ‘John Lewis economy’ and the ‘pasty tax’ the Government now needs to listen to businesses and employee organisations extremely carefully before taking the reforms further.”

The Government plans to consult on the details of the contract later this month.

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