Employees will always ask how much tax will I owe? For private companies this is a work of art as there is no defined market. We negotiate with HMRC and agree tax liabilities.
HMRC operate extremely complex rules in this specialist area. It is easy to get lost. We find the path for you.
Awarding shares for employees is one of our leading specialist areas. Employee share schemes are very popular as they are good for recruiting, create loyalty, reduce salaries and have tax breaks.
We specialise in advising on the right type of scheme for clients and are experienced in the legal and tax work needed for implementation. Our in-depth knowledge also means we anticipate key issues such as what happens when an employee leaves or the business is sold. We work with employers or personally with directors and employees who ask us to review.
We are always happy to give you a steer and a cost estimation. Please do call us to discuss.
Types of employee share schemes
There are a number of possibilities. Some schemes are designed and available for bigger companies, others for smaller businesses. There are qualifying conditions and tax considerations. The first question to ask is whether you want to incentivise all employees (known as an Employee Ownership Trust) or just selected employees (a share scheme). If you decide on a share scheme, the next question is whether to offer immediate shares or share options.
The main types are :-
Awarding shares to employees is a big step which does require some thought. If the objectives are unclear it is possible to over look the bigger picture. The usual end game is what benefit should the employees receive under the award of shares if the business is sold? The type of questions to consider include:
- Extent of participation – The directors of the employer awarding shares need to decide who do they want to provide the benefit to? Many HMRC tax advantaged plans, e.g. EMI, can be granted on a selective basis.
- How much equity to give away – The choice on how much to give away rests with shareholders. We prepare share capital tables to show the shareholders the dilution under the share scheme. If employees leave they will usually lose entitlement. The shares surrendered by former employees can, if that is desired, be returned to the pool to provide for new awards.If you are considering gifting over 50% of the business an employee ownership trust (EOT) has many attractions for both employees and the sellers.
- Performance conditions – there is plenty of discretion on this point and no legislative requirements.
- Share options and conversion terms – You need to decide what happens on reaching milestones such as years of service, financial targets, sale of the business, demerger or reconstruction, voluntary arrangement/administration order.
- What happens if an employee ceases to be employed? – Should special provision be made for death, injury, disability or redundancy? Usually these decisions are left to the director and can be incorporated into the drafting e.g. whether to allow them to retain their shares or options or what price they should be bought back by the company. These are the so called good/bad leaver provisions. If there is a departing employee who holds shares these can be bought back by the company and either cancelled or held in treasury to be recycled for further share awards.
- Are the employees paying for the share award? – there are no fixed rules. Shares can be gifted for free. Linked into this consideration is should employee enjoy inherent value accumulated pre-award? Another consideration is do you plan for a tax charge for your employees upon the award of shares?
- How will the shares be sourced for the employee share incentive? – will they be newly issued which dilutes existing shareholders, existing shares can be used if shareholders are prepared to allow for a transfer, Treasury shares can be used if the company has bought back shares (e.g. from departing shareholders). For new share issues it is necessary to consider whether the directors have the requisite shareholder approvals to issue shares pursuant to the option/share awards. If existing shares are being used it is usually necessary to consider the tax position of the transferors. Some companies link equity awards to share buy backs under which existing shares are cancelled.
- Are the existing articles and/or shareholders agreement adequate? – the articles and shareholders agreement should cater for employee shareholders. This is because they may present different risks than that of the existing shareholder base. For example what will happen if an employee leaves? Do you need good/bad leaver provisions? This is an area where employers often make mistakes which mean ex-employees walk away holding shares. If you are going to force a transfer of shares on cessation of employment – how will the shares be valued? There are plenty of choices ranging from a valuation by the accountants to the ability to appoint an independent expert.
Risks when awarding shares to employees
A badly designed award of shares gives away more equity than intended and does not enhance shareholder value. You risk demotivating employees and driving them into the arms of competitors, if you fail to meet their expectations. The directors can expect a backlash from investors.
Known disaster areas surrounding awarding shares to employees can include:
- Lack of a share capital dilution table – Lack of a share capital dilution table plotting the fully diluted position if all options and share rights are taken up. The share capital dilution table helps companies to monitor the position and meet the demands of investors.
- Poor documentation supporting the award of shares to employees – common problems arise when the drafting of the terms of the award of shares is not clear. For example getting the performance criteria and vesting schedule correct can be tricky and if poorly drafted lead to unintended consequences.
- Failing to issue the shares correctly – employers do sometimes fail to review the articles and shareholders’ agreement to make sure they obtain the requisite board or shareholder approvals. Similarly employers can overlook the various requirements under the Companies Act which have to be met when there has been an issue of shares to anyone including employees.
Tax on employee shares
There are various time limits for the reporting and payment of tax on the award of shares to employees. If the time limits are missed so can the tax benefits be lost. And, or, a charge to interest and penalties can be imposed by HMRC for failure to report and/or failure to pay tax on time.
The tax imnplications for each type of share schene are complex, for more information see :-
- Tax efficient alternatives to EMI
- How to avoid tax issues with share schemes
- How not to lose your EMI tax relief if you reorganise or restructure
Reasons to work with us
- There are usually plenty of choices and we guide employers on what is likely to work for their business. Experience is invaluable as it means the service is fine tuned and focused.
- The range of work offered spans from share awards for private companies, share options, work for international groups and larger companies.
- We have the experience of supporting employers as well as employees and directors.