Shares for Rights: A Turn in Fortunes for George Osborne's Controversial Scheme?

From a traumatic birth, to an unwelcoming baptism. The government's Employee Shareholder Status scheme - known colloquially as 'shares for rights' - has so far had a short, controversial life.

The idea of enabling staff to swap some of their employment entitlements, including unfair dismissal and redundancy rights, for shares worth between £2,000 and £50,000 in a company, predictably met scorn and rigid opposition when it was debated in the House of Commons.

"This measure sets an extremely dangerous precedent," John McDonnell, Labour MP for Hayes and Harlington, bemoaned. "The idea of selling rights could creep into other areas of policy making."

Despite loud cries against the legislation, the bill passed - following a noteworthy game of legislative Ping-Pong between the Commons and Lords - with a measly margin of 39 votes (277 in favour and 239 against) in the lower house.

Popularity

The scheme, dreamt up by Chancellor George Osborne, was promoted by the government as a measure which would cut bureaucratic red tape and boost business start-ups. Its supporters also stressed that the policy was popular within industry.

"Will the minister confirm that there has been great excitement in many areas of the business community, especially in smaller tech companies, which is a positive reinforcement of the government's enterprise policies?" Julian Smith, Conservative MP for Skipton and Ripon, dutifully asked the Minister of State for Business and Enterprise Michael Fallon.

But whatever excitement organisations may have had about the scheme, they now seem to be keeping it to themselves. Kim Roberts, an associate in Jones Day's labour and employment practice, said she has not had any interest from her clients.

"It is clear from our experience, and the shared experience of fellow practitioners in the industry - that my colleagues and I have discussed the issues with - that we are not seeing any significant level of take up of the scheme," Roberts added.

Tom Flanagan, an employment partner at Irwin Mitchell, is less polite about the initiative. "The introduction of new controversial laws are unnecessary and potentially damaging to the economy," Flanagan blasted.

"I have always wondered whether it is really about encouraging productivity and rewarding effort or, instead, part of a drive to make the removal of employment rights more palatable."

Under the scheme, income tax and National Insurance Contributions (NICs) are not usually chargeable on the first £2,000 of share value received by an employee. This is because the employee shareholder is deemed to have made a payment of £2,000 for the shares. But the normal rules for the taxation of employment-related securities apply to any value received in excess of £2,000.

This makes the initiative unattractive to employers, according to Liz Hunter, Director of share scheme specialist Rm2 Partnership. Hunter explained that the income tax charge above the entry-level £2,000 is an "initial concern" which "people would rather not have to deal with".

She added: "Whilst the shares (up to £50,000 worth) are capital gains tax free when they are sold, employee shareholders suffer income tax once they are acquired." Hunter said that is one of the reasons why a prospective client was put off by the scheme.

Practicality

But Jonathan Exten-Wright Partner, employment partner at DLA piper, said the scheme is likely to be of interest to executive teams in portfolio companies owned by private equity houses.

He explained: "The scheme was designed to facilitate opportunities for employees to enjoy the benefits of high growth such as in technology companies through shared ownership, but the market has identified that there may be a greater degree of interest in private equity owned companies.

"Those who manage companies in investment portfolios are a population who are quite familiar with receiving equity, which is designed to incentivise them to sell a company for a higher value."

Exten-Wright stressed that there is a cultural appreciation of the advantages and benefits of taking equity as potential incentive programme in the private equity industry so executives are "attuned, by definition," to be open to the initiative - particularly because of the capital gain tax incentives.

However, HM Revenue & Customs was unable to provide any figures relating to the scheme's take-up or popularity. A spokesperson from HMRC said: "There is no application or advance approval process for Employee Shareholder Status and it is not necessary for any company intending to use this initiative to notify HMRC in advance so we do not have any numbers."

Evidently, the 'shares for rights' scheme has had a turbulent start since coming into force on 1 September, 2013 and questions still remain about its practicality and popularity, but the initiative has plenty of time to win over the business community. Time, as they say, will tell.