This is one of the most spectacular examples of missing the blindingly obvious I have seen in recent years, for example, from The Telegraph
Rights for shares is a scheme that is intended to promote enterprise, employment and share ownership by employees – all good intentions. But, despite the laudable motives, the reason why government had such difficulty getting the project through Parliament was because it had simply not been thought through...
It is quite obvious that, as I said in Parliament, whoever came up with this idea is living in a giant ivory tower and has never run a business, or has any idea of business in the real world.
Yes, agreed to all that, they'll never get it past the EU etc.
But whatever you think of the scheme, what makes it so spectacularly pointless is the fact that it is a sticking plaster on top of sticking plaster on top of sticking plaster. To give you a flavour of how vicious the circle is...
i. The tax system causes unemployment, so they hike taxes on employment to pay for unemployment benefit, which reduces job security even further.
ii. So the government then introduces employment protection legislation, which discourages people from employing other people. And it increases the risks of employing people, so employers like to run their business through a limited liability company.
iii. The whole tax system is based on the highly artificial notion that there is a clear distinction between capital (lightly taxed) and labour (heavily taxed). Shares in limited company count as capital, so to prevent employers paying people in shares, the general rule is that there is a savage tax charge when employees receive shares (but they don't have the cash to pay for them).
iv. So they invent all manner of tax-favoured schemes whereby employees can be given shares with a lower tax charge, and ten years ago, they allowed the employer to claim a limited amount of tax deduction to offset the amount which is taxable on the employees.
So the idea of allowing employees to be given shares in start-up companies for a lower tax cost is trying to reverse some of these negative impacts of all these government imposed burdens all in one clumsy bundle.
As the writer of the article concludes: "whoever came up with this idea is living in a giant ivory tower and has never run a business, or has any idea of business in the real world".
Correct.
But I suspect the writer is missing the obvious as well, if you are starting up a business and a bit nervous about company administration, wrangles with dissentient shareholders, employmee protection legislation, taxes on employment, and all the fannying about with employee share schemes etc, there is one simple course of action which you can take to sidestep the whole lot shebang in one simple step:
You just trade through an LLP instead of through a limited company.
Instead of taking on employees you add them as partners. Instead of having to have Memorandum & Articles AND Shareholders' Agreement AND employment contracts AND PAYE form filling AND AND AND, you just do a partnership agreement which you can vary at will and get joiners to sign up to that, they are all bound by it equally, at the end of each year there's one single tax return to prepare (instead of separate corporation tax and PAYE returns) and it's all taxed at slightly lower rates than employment income.
By becoming a partner, you don't automatically get employment rights and there is no concept of the "shares" in the partnership being a "capital asset" quite separate to the actual assets of the business so there's no need to worry about a tax charge when somebody becomes a partner, no worries about buying back "shares" from people who leave etc etc, you just get on with it.
In other words, trading through an LLP is a simple way of achieving everything which this "shares-for-employment rights" is supposed to achieve, only much better and with added bonuses. Which raises the question, why do so many people still set up limited companies? G-d only knows.
17 comments:
"Employment rights" is a nonsense.
Employment entitlements should be the term used.
>Which raises the question, why do so many people still set up limited companies?
People tend to prefer dealing with Ltd over LLP.
SB: "People tend to prefer dealing with Ltd over LLP"
Can you be a bit more specific and give examples? Who exactly - business owners, workers, customers, suppliers..?
Mark , Sorry to come to you again for the definitive word on something but I get real answers from you , thanks. My query this time is re the deficit , the gov claims to have reduced it by a third (ad nauseam) but in my world a reduction from £160b to £120b represents a quarter ie 40 divided by 160 . I would welcome your comment on this.
VF, your guess is as good as anybody else's.
The deficit figure can be manipulated, and politicians like to muddle up "what it would have been had we increased spending at the same rate as Labour were doing" and "what we are actually spending, suitably adjusted downwards".
They also like to project ahead, so they say "Deficit will be cut by a third by the end of this Parliament".
Or you can express it as a % of GDP or adjusted for inflation, if you pencil in some nice GDP increases then the deficit is falling, or if you adjust old year figures up for inflation.
So by a combination of this tomfoolery, you can easily turn "down by a quarter" into "down by a third" or even "down by half" if you really push your luck.
Mark , thamks for that , it would appear I am not being dim then. Is it a tacit agreement between pols to not call each other out on major porkies , looks like an open goal to me.Even when "explained" the explainer is bound to look like the slippiest of slippery things.
The scheme is designed to leave EU mandated rights unaffected, precisely in order to meet the objection you raise in the 4th paragraph.
VF: "Is it a tacit agreement between pols to not call each other out on major porkies?"
Yes of course! I refer to this tactic as "Indian bicycle marketing".
For example, Tory and Labour spending plans are very similar. But the narrative is as follows:
Labour accuses Tories of "savage Tory cuts, too far too fast" and say that the Tories are making things worse at the expense of people who provide or need "public services".
Tories could deny this, but that would give the game away.
OTOH, the Tories go round boasting about "eliminating the deficit". This is patently untrue as well, but Labour can't call them on it, because that ruins their narrative about "savage Tory cuts".
So the voter who does not look into things very deeply assumes that both parties are telling the truth - if he likes lower spending he votes Tory, if he wants higher spending, he votes Labour.
And the fall back of both parties is to say that the bulk of govt spending is on unemployment benefit, which is bollocks, it's about 3% of govt spending.
Tories like saying this because they can then blame the entire recession on people who have been out of work for years, mother of ten slags in mansions etc.
Labour like saying this because they blame the supposedly high unemployment on the "savage Tory cuts".
Rinse and repeat.
H: "The scheme is designed to leave EU mandated rights unaffected, precisely in order to meet the objection you raise in the 4th paragraph."
Yes, they have watered it down a bit, but if you leave all EU mandated rights in place, there aren't many rights you can take away. So not much of a win for the employer.
And the value of the tax breaks is f- all divided by six, to be honest. So not much of a win for the employee either.
My customers...
SB, but why? Force of habit?
Mark, please don't emphasise the tax advantages of LLPs. People might get ideas. If LLPs become more popular, you can be damn sure those tax advantages will disappear.
Glad you posted this. It's where I'm going as our staffing increases. I'd've done it by now if it wasn't for the deadweight regulatory costs in doing it, upwards of £25,000.
SB, how do you know? I thought you traded through a limited company?
B, the rules have been rigged to favour partnerships because traditionally a lot of MPs were solicitors or lawyers (who use partnerships). Nowadays, fewer MPs are lawyers, but tax laws are written by the large accounting firms, who are themselves partnerships. So those advantages are not going to disappear overnight.
L, the longer ago you did it, the better. I'll say no more than that.
We just have majority part time workers.
That keeps employment costs and administration down a lot.
Its really very unfair, but then we don't make the rules. As you point out the gov makes rules and allows loopholes to appear to cover up for its own failure.
There's no rational basis behind it. Deal with bigger construction which seems to think Ltd is lower risk.
In my case - because companies buying software won't deal with LLPs - they want Ltd companies.
BQ, if that is your way of minimising the tax and regulatory burden on your business, then that is what you have to do.
SB and TS, there is only one real reason why some customers prefer dealing with Limiteds, and that is because...
IF HMRC launch the argument that the actual contract was an employment contract for one or two named individuals and not a normal arms length "services" contract,
AND HMRC win that argument
THEN any PAYE and other liabilities have to be paid by the limited company itself, not the customer/employer and the customer's risks are minimised.
Construction companies are possibly especially sensitive about this because they can also get clobbered under the CIS rules, which is like a parallel PAYE system for the construction industry.
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