So, Today, the news from the conservative conference is that The leadership want to ALLOW employees to get FREE shares in their employers company for giving up their basic employment rights.
Now, I don’t know about you, but the first thing I would say is that something you have to GIVE UP something for is NOT free.
You are purchasing these shares at a hefty price. So, strike 1, not FREE, bought dearly.
Now, they are saying this is an OPPORTUNITY, an opportunity for the employer but also an opportunity for the employee. To become more engaged, more invested. Well true. But, there are a couple of problems here too. For one, this is being targetted at SMEs. Now, most SMEs are not traded on the stock exchange. They are what is known as Private Limited Companies. The ‘market’ for these shares is extremely limited. Indeed, in many instances the owner of these type of shares is bound to offer them to the company with a right of first refusal. In addition, there are all sorts of games an employer can play with diluting shares into worthlessness.
So, with all this against them, why?
This is not about offering people a share of their employer. This is about crafting a new and versatile tax loophole for LARGE business.
Think about it. These shares are exempt from capital gains tax. So, if you CAN sell them on an open market, you have a ready made tax free conduit to siphon off money from a company with no tax downside.
Now, I am not a lawyer or an accountant or a tax expert, but there are some things that I can see immediately.
First off, there is a limit to the value of these shares (I have heard the notion of between 2 and 50 thousand pounds worth)
Ok, WHEN. when is the value assessed? at initial assignment (possibly, probably). At point of cashing out, almost certainly not.
So There is the opportunity to be able to extract unlimited value from a company with no tax downside simply be manipulating the company share price.
Second, how is the assignment of the shares and the value they represent handled from the point of view of the company itself? They are removing an asset (the shares) and giving it to someone else. Are they able to count that as a loss to the business with all the benefits to themselves of having to incur that notional loss. Secondly, if it IS a private company and they choose to buy back the shares from the person (the only way he is going to realise profit in this situation) do they get to take another accounting loss when they expend MORE money to purchase back these inflated stocks?
It seems to me that this is actually a tailor made opportunity for big business remuneration architects NOT for the little guy in the startup.
Tax free income (no capital gains) with a nice tax writeoff for the company on the backend.
I would not be surprised if the govt floats another idea soon, something maybe about closing the international profit scams of the large multinationals, while quietly opening up this underground railroad for profit extraction under the guise of assisting SMEs. Hey, it’s nice work if you can get it.
Now, if anyone out there IS an accountant and sees where I am wrong, please feel free, enlighten me.