Shares-for-rights scheme offers avoidance opportunity

THE GOVERNMENT’S shares-for-rights employment scheme is allowing the private equity industry to cut its tax bills.

Under the scheme – brought in last month by George Osborne (pictured) – workers sacrifice basic employment rights including the right to declare unfair dismissal; a redundancy pay-off; any right to demand flexible working hours; and time off for training. Additionally, mothers on maternity leave would be required to give 16 weeks’ notice of their return date instead of eight.

In return, they receive shares worth between £2,000 and £50,000, which would be exempt from capital gains tax.

Private equity firm European Capital sold dried fruit and nuts supplier Whitworths to another private equity house, Equistone, in a £90m deal. As part of the deal, eight members of the senior management team are each being offered equity stakes under the shares-for-rights scheme worth up to £50,000 by the new owners, the Financial Times reports.

If the shares are sold at a profit they will be exempt from capital gains tax, which would usually be levied at 28% on gains above £10,000, although the recipients will still have to pay income tax.

The allowances prompted the Institute for Fiscal Studies to raise concerns over potential for tax avoidance, while shadow business secretary Chuka Umunna was critical of the facility, pointing to the paltry six enquiries received by HM Revenue & Customs in the three months to September.

“While the scheme has been shunned by business, it appears that the concerns raised by the Institute for Fiscal Studies and others on the scheme being used for tax avoidance are being borne out now that it has been introduced,” he said.

Director of the IFS think-tank Paul Johnson warned last year the scheme would “foster a whole new avoidance industry”. The Treasury expects around £80m will be lost in 2017/18 to the scheme, but the Office for Budget Responsibility puts the figure closer to £1bn.

“It appears the concerns raised by the IFS on the scheme being used for tax avoidance are being borne out now that it has been introduced,” it added.

Equistone, though, denied tax avoidance, adding it would use the scheme again and that no further employees were to be asked to give up their rights for shares.

“It is about giving management an incentive to grow the business,” it told the FT.

The Treasury said it was monitoring the scheme following its launch to make sure it was being “used appropriately”.