employment Archives - London Chartered Accountants Blog

The Government recently confirmed its intention to introduce a new type of employment contract in which it would be lawful for employees to waive certain statutory employment protections.

In exchange for reduced employment rights, employees would be offered shares in their employer with a value between £2,000 and £50,000. Although the acquisition of the shares would be subject to income tax (and national insurance, if relevant) the eventual sale of those shares, by the employee, would be exempt from capital gains tax.

Details released to date suggest that the legislation is principally intended for small and medium sized companies, but companies of any size will be able to use this opportunity. Rights which may be forfeited include unfair dismissal, flexible working, maternity leave and redundancy payments.

There will be flexibility in the legislation which permits the opportunity to be offered to employees recruited after the legislation is enacted or both future employees and current employees.

Some beneficial share option schemes, such as Enterprise Management Incentive, have restrictions as to their use if employees already hold shares in their employer. Current proposals imply that these existing share option schemes will not be adversely affected by the new legislation.

It has been suggested that legislation will be enacted from April 2013 and the Government will consult with Industry as to the practical implications of the proposals before then. Obvious practical considerations which need to be ironed out include the impact of numerous employees having an influence on the strategic direction of a private company and the alternatives should an employee leave the company whilst holding shares in their employer.

The rates of national insurance (NIC) paid by employers and employees are all going to rise by 1% from April 2011. People earning less than £20,000 will be immune. Unlike income tax, NIC discriminates between employed and self-employed with lower rates for the self-employed.

The changes are estimated to yield an additional £6.5 billion between 2011 and 2013. This dwarfs the £550 million expected to be raised by the much publicized one-off bank bonus tax.

For example, an employee earning the mean UK salary (full time £31,323), the total cost of employment would be £34,600 in 2009-10. If net pay increased by 2.9% (forecast RPI) for 2011-12 total cost would be £36,428. This means a 5.3% increase in employment costs to allow an inflationary increase in net pay.

Unemployment is expected still to peak at 3 million (9.6%), so businesses should be encouraged to take on staff, this will certainly not!

The changes are estimated to yield an additional £6.5 billion between 2011 and 2013. This dwarfs the £550 million expected to be raised by the much publicized one-off bank bonus tax.

Unemployment is expected still to peak at 3 million (9.6%), so businesses should be encouraged to take on staff, this will certainly not!

The recent US November unemployment figures showed a fall from 10.2% to 10.0% and spurred consumer and investor confidence, although some dismissed it as a blip. Therefore, employment is pivotal to the economic recovery.

Overall, raising NIC will have a detrimental effect on the recovery and may stifle some “green shoots”. This is a view shared by many business leaders – Richard Lambert, CBI Director-General, said “The Chancellor has made a serious mistake imposing an extra jobs tax when the economy is still fragile.” and David Frost, Director General of the British Chambers of Commerce, “The NIC rises mean a brake on employment growth. While everyone understands the importance of restoring the public finances to a sustainable path, a tax on jobs in not the way to do it.”

However, with borrowing of £176bn predicted for 2010-11, net debt at 65% of GDP and a promise to protect frontline services, the money has to come from somewhere. A rise in VAT beyond 17.5% was mooted but not announced – this has problems as it’s not a progressive tax and consumers are unable to reclaim it, so would hit the poorest. Darling is in a corner!

In the face of the mind-boggling borrowing figures, one can imagine how he thinks the rise fits the precarious balancing act of voters, borrowing and economic recovery performed at 11 Downing Street. Unfortunately, tax on jobs is a risky option.

Whether it dangerously cools the job market or is ever even enacted – only time will tell.