Employee share schemes

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Employee share schemes

We solve the challenge of what type of arrangement is best and how to implement. The issues are potentially complex but we simplify wherever possible. Our expertise spans design, tax, legal, drafting and share valuation.  We work with all types of employers including those under the control of foreign parents.

Employee shares – Establishing the benefits

There are some common benefits applicable to any type of share or option award.

Potential advantages for employers

  • Greater productivity;
  • Retention of key staff;
  • No cash cost, other than possible National Insurance Contributions;
  • Flexible plan design;
  • Favourable tax treatment, usually.

Potential advantages for employees

  • Acquire shares in their employer’s company;
  • The chance to make money;
  • Relatively risk free;
  • Favourable tax treatment, usually.

HMRC approved share schemes vs unapproved employee share schemes

There are two types of employee share scheme:

HMRC approved share scheme

These schemes include: Enterprise Management Incentive (EMI) optionsCompany Share Option Plans (CSOP), Share Investment Plans (SIPs) and Save As You Earn (SAYE). Usually these schemes enjoy legitimate tax advantages, as the Government designed these schemes and is encouraging adoption.

Unapproved share scheme

These schemes lack HMRC approved plans’ tax advantages.  Clients usually adopt unapproved share schemes when they cannot meet HMRC’s qualifying conditions. Consequently, our unapproved schemes are bespoke, and exactly match our client’s requirements.

HMRC approved options vs unapproved options

In the UK, employers can implement HMRC approved options or unapproved options.

Types of HMRC approved options

HMRC approved options comprise:

  • EMI options – most tax efficient type of approved option available and targeted at start ups and smaller SMEs. Intended to be used on a selective basis – i.e. do not have to be made available to the entire workforce.
  • CSOP options – usually implemented by larger quoted companies that do not qualify for EMICSOP options do not have to be made available to the entire workforce.  CSOP options are popular with US and other overseas businesses wanting to motivate the UK workforce.
  • SIP – all employee share incentive plans designed for the entire workforce to be eligible to participate.  A SIP can include options as well as free shares and matching shares.  Tend to be implemented by larger quoted companies.
  • SAYE – all employee share incentive options scheme designed for the entire workforce and linked with a savings plan.  Again, aimed at larger quoted companies.

Advantages of HMRC approved share options

  • All of the HMRC approved share option regimes carry tax advantages saving employers and employees income tax and national insurance.  The tax position is unique for each type of HMRC approved share option scheme.  We will assess the position for your business and proposed recipients of option awards.
  • There is a degree of flexibility for employers under the HMRC approved share option regimes.  For example, it is possible to impose vesting schedules.  Employers have discretion over participants and awards under EMI and CSOP but not with SIP and CSOP since they are all employee plans.
  • It is possible to use shares in a foreign company for option awards to a UK subsidiary under all HMRC approved share option schemes.

Typical recipients of HMRC approved share options

Given the tax advantages, most employers consider an HMRC approved share option scheme before awarding unapproved options.

Unapproved share option scheme

If a company or the participant does not meet HMRC’s conditions for an approved share option scheme we can look at an unapproved share option scheme.

Advantages of unapproved share option schemes

  • Very flexible;
  • None of the restrictions imposed for HMRC approved schemes apply;
  • No restrictions on the corporate structure of the business and therefore available for any business irrespective of share ownership;
  • Easy to adapt shares in a foreign overseas holding company for awards to a UK workforce.

Disadvantages of unapproved share option schemes

For UK resident option holders the gain made on exercise of the unapproved option will be assessed to income tax and usually National Insurance.

Typical recipients of unapproved options

We tend to implement unapproved options for consultants and non-executive directors.  Unapproved options are also popular where the employer wants to grants shares in a subsidiary company.  There are other cases where unapproved options are attractive which we will explain.

Employee shares – shares compared with options

Unlike options, shares give the employee a percentage ownership of the company. Employees also immediately become shareholders. Care is required when giving equity away as you will probably need to make sure that you can get the equity back again if the employee/director is no longer part of the businesses.

Advantages of shares over options

The share award can be:

  • Structured so as to maximise the chances of the employee benefiting from the lower rates of capital gains tax compared with income tax;
  • At the employer’s discretion: different employees can receive different awards;
  • Entitle the employee to dividends;
  • Build a stronger sense of a stake in the business than an option can.

Disadvantages of shares

  • Income tax and usually National Insurance will be payable on any benefit given to the employee.  What this means in simple terms is that if you gift shares to employees there will be a tax charge;
  • If the share value falls, HMRC does not refund any tax paid by the employee.

Employee shares – implementing your employee share scheme

To be successful you need a plan of action.  We can formulate that plan for you and solve queries which inevitably arise.

Employee share scheme plan of action

We flag up typical issues to consider such as:

  • Which employees: e.g. all or some. If so, what criteria;
  • Number of participants;
  • Employee or company’s performance conditions;
    • What if an employee ceases employment;
    • Provisions for employees’ death, injury, disability or redundancy;
  • Cost of shares to employee: i.e. from free to market value;
  • Share options vs actual shares;
  • Percentage of equity diluted;
  • Timing;
  • Company’s exit strategy;
  • Whether the existing articles of association and shareholders’ agreement are fit for purpose.

How to make your employee share scheme successful

Success is difficult to predict.  But, what we can spot for you are areas which are likely to make your employee share scheme unsuccessful.  The stumble points explained below can usually be avoided with forward planning.

Based on experience common pitfalls employers stumble on include:

  • Poor employee communication – there is is no point in running an employee share scheme that no one understands. We are skilled in “selling” the potential share valuation, without misleading employees;
  • Good and bad leavers – shareholders are unlikely to be impressed if your employee share scheme gives away equity to those not contributing to the business;
  • Sale of the company – you need to make sure that an employee under your employee share scheme cannot stop a sale. This problem is usually addressed by drag along provisions which we will raise with you. 

Impact of corporate transactions on the employee share schemes

If your company is sold or re-organised there will be issues to consider in connection with the employee share scheme. We are often instructed to solve the issues.

Employee consents

Employees who become shareholders, even if only momentarily before the transaction completes, must consent to the transaction. We know how to keep employees on-side.

Loss of share rights

If the company’s acquirer does not offer comparable share rights, then there are issues. The share rights could form part of the employment agreement, so contract law might apply.

Impact of asset sales on employee share schemes

TUPE transfers can be especially problematic because TUPE prevents changes to terms and conditions. However, the new employer will not be able to match the employee share scheme as it will be a different business with a different or no employee share plan in place.

Employee shares – HMRC reporting

Both private companies and employees have reporting obligations to HMRC in relation to employee share schemes. Reporting applies to all companies including companies controlled and managed abroad.

Employer HMRC reporting obligations

Employers must:

  • Register each government approved employment related securities scheme or arrangement using the ERS Online Service.
  • Notify the EMI option grant within 92 days of date of the option grant.
  • Register an unapproved employment related securities scheme or arrangement when a notifiable event occurs.
  • Submit an annual online tax return by 6 July every year for every employee share scheme run by the company.
  • Deduct PAYE and NIC on certain types of share awards, e.g. the gift of shares which are readily convertible assets.
  • Declare any share related benefits in kind to employees on P11D, e.g. loans to employees to postpone payment of share price for employee share scheme.

Companies which do not report to HMRC on time suffer penalties. To spare you the risk of mis-reporting we deal with the reporting for you. Please read about our HMRC reporting service here.

Employees’ reporting obligations

Some share awards must be reported by employees via self-assessment tax return and the tax paid by the employee. Where shares are acquired at an undervalue or the shares are restricted shares an employee may want to submit a s.431 election to decrease his future tax liability. Failure to report will result in penalties and interest.

Track record for employee share schemes

We have helped many employers find solutions to a range of challenges. Some of our success stories include:

  • Design and implementation of a multijurisdictional scheme for a Jersey based parent company with subsidiaries in the UK, Dubai, USA and Russia. We carried out an extensive viability analysis, designed the scheme for TopCo and rolled out the scheme across the different jurisdictions through our global network;
  • Assisted in seven rounds of EMI option grants to key employees of a successful travel company;
  • Designed a bespoke performance based share scheme for three key employees of an e-gaming company;
  • Acted on behalf of a director buying into a successful bakery business based in South Kensington. The director received a mixture of straight shares and unapproved options;
  • Represented a former Goldman Sachs director on a transaction in shares in South East Asia and the tax implications of it for his UK tax liability.

Your business involves people and our business is helping you to improve productivity of people. There is over whelming evidence that employee share schemes do improve productivity. Our years of experience help us to take you to the solutions suitable for your business.  Businesses differ and the best solution for one may not be the best for another.  We look at your people, your goals for your people and the return your shareholders are expecting from an employee share scheme.