Why our clients pick us
- We have the experience you will need to help you decide whether to offer share options and if so, which type of the multitude of arrangement possible is the best.
- We cut down on the need for many different sets of advisers as we can handle the whole process for you from design, implementation, communication through to HMRC reporting.
- Years of experience have left us attuned to the needs of employers.
Share options offer employers a choice
In the UK there is far more choice for employers in terms of the type of arrangement to pick than is on offer elsewhere in the world.
HMRC approved options
Four types of option arrangements confer special tax advantages for employers and employees if various legislative requirements are satisfied – these options are known as HMRC approved options.
The types of approved share options schemes are listed below. Please visit our pages on each of these types of HMRC approved share options.
- Enterprise Management Incentive (EMI)
- Company Share Option Plan (CSOP)
- Share Incentive Plan (SIP)
- Save as you Earn (SAYE)
When we are dealing with private companies the starting point will always be EMI options. Of all the option arrangements possible in the UK EMI outshines on many fronts and is particularly tax effective. In some cases EMI options cannot be awarded as the qualifying conditions are not met – in those cases we will consider alternatives which can be tailored for the business.
If you do not fit into one of the four types of HMRC approved options you can still grant options which are known as unapproved. You choose unapproved share options, as the fact they are not HMRC approved does not mean they are somehow unlawful or not acceptable to HMRC.
For more information on unapproved options please visit
Benefits of options
The Quoted Companies Alliance (QCA) has published the latest results of a survey conducted to find out why smaller companies offer employee share schemes to their workforce. The survey found that the most popular schemes were Enterprise Management Incentives (EMI) options with 44% of the companies surveyed offering this type of scheme.
Rewarding employees was the highest ranking reason for operating employee share schemes, as well as to improve recruitment and retention of staff. The understanding of plans was the most significant barrier to share schemes being offered. If you need help understanding and implementing a share scheme and its performance, we can help.
Flexibility for employers
Employers have flexibility when it comes to implementation of share option awards. Benefits for employers include:
- The ability to design the option rights and the terms to suit the need of the business. Some HMRC approved option plans have to be offered to the entire workforce. A benefit of EMI is that the employer gets to chose who receives options, how many and how much the employee has to pay for them.
- Avoiding complications that can arise if voting rights are conferred;
- There are no shareholder rights such as the right to request access to company financial information; and
- Options do not dilute existing shareholders until exercise. However, we always recommend a share capital table is prepared before the options are granted so that employers and their shareholders understand the dilution that will arise on exercise.
Position of option holders compared with shareholders
Unlike options, shares give the employee ownership of the company. If you gift shares to employees, in most cases, the articles of association or shareholders agreement will require amendment to deal with compulsory transfer situations such as leaving employment.
There is no need to change the articles of association or shareholders’ agreement for option holders until they become shareholders. In the case of options which are only exercisable upon sale of the business there may never be need to change the articles. This is because the option holder exercising upon the sale will only be a shareholder momentarily.
Upon sale, exercise is usually wrapped up with the sale documentation to eliminate the risk of the option holder not consenting to the sale.
A share award gives rise to:
- An opportunity to bring profits made on the shares within the capital gains tax regime which carries a lower rate of tax than profits taxed to income.
- An immediate charge to income tax and often national insurance on any benefit conferred upon award of the shares. With an unapproved option there is no tax on award.
- Risk for the employee as if the shares decrease in value HMRC does not refund the income tax or national insurance paid on award.
- Immediate dilution for shareholders. With an unapproved option there is no dilution until exercise.
We use our experience to help employers design the best arrangements for their business.
Position with share options on termination of employment
An advantage of either HMRC approved share options and or unapproved options is that if employees or directors leave the business before they have exercised their options the usual position if that the option will lapse. It is possible to draft the share option documentation in such a way as to remove the employer from liability to pay compensation for loss of share option rights.
By contrast, if any type of option has been exercised and shares have been provided to the employee or director the position on leaving employment is not as straight forward. There is no automatic lapsing. The position will depend upon what is set out in the articles and or shareholders agreement.
A phantom option does not involve the issue of shares. The idea is that a cash bonus is paid to an employee which is measured against the performance of shares in the employer or its group. Payment under the phantom option plan is treated as income and subject to income tax and national insurance under PAYE.
A phantom option would be considered where the issue of shares is not desired – usually because of an inability to obtain shareholder approval.
Managing the option process
It is only once the option has been exercised and the shares issued that the employee becomes a shareholder. Value in both HMRC approved options and unapproved options is only realised when the option shares are sold. We work with employers to guide them through this process. The areas most commonly needing review include:
- What will the share capital table look like following the issue of new shares on exercise of options;
- Has an option satisfied the conditions necessary for tax relief throughout the life of an option? For example, have shares been physically issued on exercise and before sale – a common trap employers fall into.
- Will PAYE and NI apply? We are seeing an increasing number of cases where the company is being acquired and the lawyers acting for the buyer want to operate PAYE on the exercise of EMI options. This may provide comfort for the buyer but the option holder will invariably lose out. We deal with resisting the operation of PAYE in cases where the EMI option and other types of HMRC approved option qualify for approved tax status.
- Responding to enquiries raised by HMRC.
- HMRC reporting – the legislation is surprisingly and unnecessarily complicated.
Help for employees and directors
We review share option proposals offered to employees and directors. The benefit of working with employers of all shapes and sizes helps us spot the issues employees and directors need to be aware of.
Please do contact us to discuss your queries. We are always happy to quote and provide an outline scope. We are known for being practical and cost effective. Companies with option arrangements in place out perform those that do not offer share incentives.