The belief that early stage equity is a better way of underpinning the growth of Britain’s SMEs was given a short-term boost by the Chancellor of the Exchequer at last week’s Conservative Party Conference.
His plans to introduce (with details to follow) a new ‘owner-employee’ share ownership scheme temporarily suggested that the 1986 surge in private investor share buying, stimulated by the encouragement of Sid to buy shares in British Gas, might be returning. Sid had a point. £135 (the maximum allowed) invested in the energy supplier, with dividends re-invested, would now be worth (in what is now known as Centrica) around £2,000.
On this occasion the Chancellor was suggesting that new employees might receive between £2,000 and £50,000 worth of shares, which would be exempt from capital gains tax, in return for giving up their employment rights including unfair dismissal, redundancy, flexible working hours and time off for training.
The Chancellor needs a success. His SEED EIS plan for companies to raise £150,000 with investors receiving rather generous fiscal incentives, is floundering due mainly to the draconian regulatory regime being operated by the Financial Services Authority (“FSA”). His Funding for Lending scheme, intended to encourage banks to lend to business, is seemingly failing and producing unintended consequences such as higher mortgage rates for consumers.
The ‘owner-employee’ scheme is being lambasted. The ‘Financial Times’ said that there were ‘fundamental problems’ and ‘The Mail on Sunday’ has called it ‘an unworkable gimmick’.
Apart from mixing rights with rewards the main issues are:
The intended legislation will clash with EU law
- Who will advise, and pay the costs, for intended employees to be correctly advised?
- The proposal is unnecessary: there are currently four types of staff share schemes: ‘Save as you Earn’, share option plans, share incentive plans and ‘Enterprise Management Incentive’ schemes.
- The sketchy detail suggest that companies may be able to force employees to sell their shareholding at a ‘reasonable’ price when the employment is terminated.
This may happen when the price is well below the original value. The employee may not have any appeal.
It is regrettable that yet another Coalition proposal is being introduced without any real thought and planning. Poor old Sid will have to wait a bit longer.