Owner-employee contracts: the tax

End of Zero Hour Contracts

From April 2013 companies will be able to offer owner-employee contracts. These will trade employee rights for tax breaks. But what’s in it for your business?

What are they? Simply put, owner-employee contracts (OECs) are normal employment contracts, but with some of the statutory employee rights removed: to claim unfair dismissal, redundancy or apply for flexible working. They will also require mothers to provide more notice (16 weeks) if they intend to return to work after a maternity break.

Tax break. In exchange for forfeiting these rights an employer can offer new and existing employees between £2,000 and £50,000 worth of shares in their company. Any gain made by the employee when selling or transferring these will be tax-exempt.

Share trouble.There are tricky issues that will need to be sorted out before the scheme comes into force. For example, share valuation will need to be simple and fast – currently, it’s notoriously slow and difficult – and what will happen to the shares when an employee leaves?
Tax planning.We think there’s mileage in OECs as an out-and-out tax incentive. The trouble is the legislation hasn’t been drafted yet, so it’s impossible to draw up firm plans, but we’ve come up with a few ideas you might want to keep in mind for next year:

  • shift profits to your family tax-free by employing, for example, your son or daughter under an OEC. Purchase their shares after a few years thus allowing them to walk away with a tax-free lump sum
  • include a buy-back clause in the OEC which allows employees to continue in their job, but to receive what effectively amounts to a tax-free bonus
  • offer an OEC in exchange for a reduced salary, i.e. a salary sacrifice arrangement and save employers’ NI costs.

Watch and wait. There are some tantalising tax-saving prospects, but if we’re honest we expect some of these to be stifled by heavy handed anti-avoidance rules. We’ll keep you posted on developments.