By Daniel Hunter

Although a step in the right direction, action announced yesterday (Wednesday) by the Government to simplify ‘over-burdensome’ share buy-back rules will not boost employee share ownership for small to medium-sized enterprises (SMEs) believes George Lovell, tax partner, DTE Business Advisers.

The changes to Companies Act 2006 make it easier for a company to buy back shares owned by an employee when they leave the company, and will also enable the company to hold those shares for reissue to other employees. This follows the introduction of tax incentives designed to encourage businesses to award shares to their employees, with partial exemptions from income tax and capital gains tax on employees’ shares.

“You have to ask yourself; would this tempt an owner managed business, set up by a family or by a risk-taking entrepreneur, to issue shares to its employees, and you’d have to conclude that in most cases it wouldn’t,” explains George Lovell.

“It may make it more flexible for owners to give out shares to employees, but the reality is that the people who set up a business and take risks in doing so, are much less likely to give out shares regardless of changes to legislation.

“Hopefully this package of changes will encourage businesses to at least think about doing it. My concern is that the tax incentives do not go far enough; the first £2,000 of shares awarded to an employee will be free of income tax and NIC, and capital gains of up to £50,000 on the sale of their shares would be tax free, but in return the employee has to give up valuable employment rights such as the right to claim unfair dismissal, statutory redundancy payments and flexible working. I think when businesses and their employees look at the detail; the numbers just don’t stack up.

“We know that employee-owned companies can be more profitable, create more jobs and on the whole have been relatively resilient during the economic downturn, but more radical support is needed to get SMEs to drive the economy back into growth.

“It’s a step in the right direction, but it falls short of encouraging employee share schemes for SMEs.”

According to Government figures there were around 250 UK businesses wholly or significantly owned by their employees, with an annual turnover of approximately £30 billion and 130,000 employees, in 2011. The Government estimates that between 50,000 and 80,000 employees a year may eventually benefit from the income tax and NIC exemptions on employee shares.

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