Key features and establishment of employee share schemes and their ongoing administration
Open to all sizes of company, employee share schemes are a useful way to help recruit, retain nd motivate employees
For listed companies, such schemes also help align the interests of senior executives and directors with those of shareholders in promoting the long term interest of the company and its shareholders
Many but not all employee share scheme benefit from tax reliefs as employee share schemes are generally seen by the Government as a good way to promote economic success and expanding ownership of companies to include employees
HMRC sets the qualifying conditions for the operation of approved share schemes. It is important that these conditions are complied with in order to gain and maintain any tax benefits and to preserve the favourable fears of the approved share scheme. As these conditions may be subject to change from time to time, CS involved in administering the share schemes should ensure they keep up to date with any changes
For an employer there are advantages and disadvantages
Advantages
Aligns employee and shareholder interests
Aids employee retention and recruitment
Remunerates employees in a tax efficient way
Raises working capital
Disadvantages
Adverse effect on morale if the share price falls
Admin costs - initial set up costs and long term costs of administering the scheme
Dilution of share ownershp
Risks of unrealistic financial expectations among employees
Difficulty in selling shares post exercise for employees in an unlisted company and potential need and costs to establish employee benefit trust
Enterprise Management Incentive (EMI)
An EMI scheme is a discretionary scheme allowing an award of share options with more favourable tax treatment than unapproved schemes
Most popular due to their tax advantages and flexibility
The employer must have assets of not more than £30m, not more than 250 employees and must bee carrying out a qualifying trade to issue EMI options
EMI options can be granted up to the value of £250,00 per employee in a 3 year period and an employer limited to an aggregate of £3m
The option period is capped at 10 years with no minimum initial holding period
No income tax or NI contributions are charged on the grant of EMI options provided that
The exercise price is at least equal to the market value at the date of the grant
The options continue to quality until the date of exercise
CGT will be due on ale in respect of any gain over the exercise price
Company Share Option Plan
Discretionary scheme
May be offered by company regardless of size
Maximum option value is £30,000 per employee based on the MV at the date of the grant
Option period must be between 3 and 10 years
Income tax and NI are not due when the option is granted or exercised
Options must be in the ultimate parent company of a group and must be of the same class as those held by the group controllers
CGT will be due on sale
Save As You Earn (SAYE)
Must be made available to all employees although this can be subject to an initial period of employment of up to 5 years
Employees are granted options to buy ordinary, fully paid and unrestricted shares after 3 or 5 years of service at a discount of up to 20% of the MV at the date of the grant
The employees can contribute between £5 and £500 per month for either 3 or 5 years in order to purchase the shares at the end of the option period or the cash can be withdrawn by the employee as a lump sum
Provided that the minimum option period of 3 years is observed there is no income tax charge on the grant or exercise of the option. CGT will be due on sale in respect of any gain over the exercise price.
Companies will receive corporation tax relief on the cost of establishing and administering the SAYE scheme
Share Incentive Plan (SIP)
Four types of SIP shares that a company can offer its employees either alone or in combination
Free shares
Partnership shares
Matching shares
Dividend shares
The company is entitled to provide each employee with free shares up to a value of £3,600 per year with no income tax or NI consequences
Free shares can be awarded by reference to an employees pay grade, performance, length of service or hours worked
Employees may also instead be offered the opportunity to purchase the lower of £1,800 or 10% of their salary in partnership shares per year out of their pre-tax and pre-NI salaries
The company may then match these partnership shares at a ratio of up to two matching shares for each partnership share purchased by the employee, effectively allowing a further £3,600 worth of free shares to be given by the company each year
The company may also allow participants to reinvest any dividends paid on the shares by purchasing dividend shares. There is no income tax charged on the dividends that are paid out
SIP shares must held for a minimum of 5 years with the shares being held by an employee trust during the holding period.
Corporation tax relief can be obtained by the company for the cost of setting up and administering the scheme
Unapproved share options
Do not benefit from any tax incentives and are not subject to any external restrictions on their grant, exercise or value
The employee will be subject to income tax via PAYE tax and potentially NI contributions on exercise of the options
The company may also need to make a NI contribution
Any options granted to an employee under a CSOP in excess of the maximum option-value of £30,000 will be treated as an unapproved share option
Growth shares
Provided the shares are issued at a premium to the current value there should be no tax charge on issue
The shares can be subject to conditions such as milestones, length of service etc
These conditions need to be set out in the terms of issue and/or Articles
Unless the recipient hold 50% or more of the issued shares, no entrepreneurs relief is available and normal rates of CGT will apply to any gain
The shares are issued immediately with no vesting period