Giving your staff a share

Giving your staff a share in your company is a great way to reward staff for their hard work whilst also helping with staff retention. However, deciding to give shares to employees is not the only decision you have to make. There are several ways to do this, and all depend on your business and circumstances. Here, we explain what these options are further to help you make the best decision for your company.

Employment Related Securities 

Employment Related Securities (ERS) are a way of transferring shares as a gift or an award to employees of the company, including its directors. ERS schemes can be either tax-advantaged or non-tax-advantaged.  We will discuss both types within this article.

Tax-advantaged schemes include:

• Save as you Earn (SAYE)
• Company Share Option Plans (CSOP)
• Enterprise Management Incentives (EMIs)

The tax advantage of giving your staff a share means that the employee receiving the shares may not need to pay tax or National Insurance on the value of the shares.

You may choose to go about giving your staff a share through a non-tax-advantaged scheme if the tax-advantaged methods listed above are not right for the business  or you do not meet the criteria. Through some non-tax-advantaged schemes, employees can be gifted or awarded the option to acquire shares and will only pay income tax on their shares when they choose to exercise their options if they acquire the shares for less than market value.

As an employer using an ERS scheme,  it is likely you will need to submit information about these changes on an ERS return to HMRC. For many small companies, the ERS schemes mentioned above can be overly complex. Therefore if you do opt for one of these, we highly recommend you also receive advice from your accountant.

Exempt rules- family/ personal relationships 

There are, however, certain circumstances where an ERS is not required. For example, a share transfer between people who have a personal relationship such as a transfer between spouses. You also don’t need to file an ERS return if the share transfer is to shareholders who are not employees or directors of the company. Or, if the transfer takes place before the company starts trading.  Again, you should have this confirmed by your accountant before proceeding.

How do ERS securities vary?

Restricted securities and convertible securities 

Both restricted and convertible securities can be used as a form of employee share incentive and each type of share is subject to its own tax rules.

Restricted securities are employment-related securities that, from the time that they are acquired are subject to identifiable restrictions which reduce their value. Usually, the restrictions will relate to the ability of the employee shareholder to keep their shares after they have left the business or their ability to sell them.

Convertible securities are relatively common in private equity and venture capital situations. These shares will typically have only limited rights when they are first issued but will have the ability to convert into securities of a different type when certain criteria are met.

In some circumstances, it can be difficult to distinguish between these two types of securities and to establish the correct tax plan. This is why it is important that the correct tax treatment is being used.

Enterprise Management Incentive Scheme  (EMI)

What is an EMI scheme? 

Initially launched in 2000, an Enterprise Management Incentive (EMI) scheme is an approved employee share scheme available to the majority of trading companies and allows them to grant share options to key employees in a tax-efficient manner.

What are the benefits of an EMI scheme? 

EMI schemes are often attractive to companies who want to:

• Reward, motivate and incentivise key staff members
• Retain key staff
• Align the interests of employee and company

There are a range of benefits to an EMI scheme including

• No income tax or national insurance is payable when EMI options are granted
• When option shares are sold, the employee will be liable for capital gains tax (CGT), currently at the entrepreneur’s relief rate of only 10% rather than income tax  level.
• Options are a great incentive for key employees to stay at the company and work hard for the business’ success. Most share options are no longer valid once the employee has left the business.
• Employees on the whole feel much more aligned with the interests of the company and other shareholders. Everyone is focused on building the shareholder value together.
• Employee feel much more appreciated
• The costs of setting up and administering the EMI will be deductible expenses for the company against corporation tax.

What are the qualifying conditions? 

EMI schemes are approved by HMRC and therefore there are various conditions that must be met by the employer, employee, and the share options themselves. Fortunately, these conditions are relatively easy to meet and allow tax advantages to be obtained that are beneficial to both parties.

The following conditions must be met by the company  

• The total value of the company’s gross assets must be less than £30 million
• The company must be a trading company (NOT an investment company)
• The company must not be a subsidiary of or controlled by a holding company.
• There must be fewer than 250 employees at the date the EMI options were granted

The following conditions must be met by the employee 

• The individual must be an employee of the issuing company (this can include directors)
• Employees are required to spend at least 25 hours per week, or at least 75% of their working time as an employee of the company
• The employee must not hold more than 30% of the shares

The following conditions must be met by the share options: 

• The market value of the option (including all other share options) must not exceed £250,000 per employee, at the date of grant. Any options which exceed this limit will be unapproved share options.
• The terms of the share option must be agreed in writing.

How are EMI schemes administered? 

In order for a company to take part in an EMI scheme, they must obtain prior clearance from HMRC. They must confirm that the employer is a qualifying company and establish the market value of the shares at the date of the grant. EMI valuations are usually valid for 90 days from the date of agreement. However, this has been extended in light of the pandemic. So, for any new EMI valuations created on or after 1^st March 2020, will automatically by valid for 120 days instead.

Other Share Schemes  

There are several other share schemes available which a business may want to adopt.

Non Advantaged share plans  

Non-tax-advantaged share plans enable employers to offer staff the option to purchase shares in their company in the future, at an agreed pre-set price. You may decide to do this instead of giving your staff a share. This type of share plan differs from others as there is no requirement for HMRC to provide approval for their use. This is therefore a great option if the company in question does not qualify for other share schemes such as Company Share Options Plans or EMI.

Share Option Plan (CSOP) 

The Company Share Option Plan (CSOP) is a tax-advantaged share option plan where a company may grant options to any employee or full-time director. This scheme requires that the individual receives shares at an exercise price that is not less than the market value of the shares on the date the option was granted.

Whilst this is in theory very similar to EMI schemes, there is one major difference. There is no limit to the company size or number of employees for a CSOP to be granted. Therefore, this is a great option for larger companies and non-trading businesses such as accountancy or banking companies.  The CSOPs tax reliefs are also very generous as long as certain conditions are met.

However, it must be noted that CSOP can be more restrictive than EMIs. This is because

• Options must be granted at market value
• Each employee can only be granted up to £30,000 of options
• Any gain made by the individual is only exempt from income tax if the options are not exercised within three years.

Save as you Earn Scheme (SAYE) 

A SAYE scheme allows employees to save a fixed amount of their salary for a certain amount of time in exchange for the opportunity to purchase shares in the company at the end of this pre-determined time period. The shares are often lower than the market price and can receive significant tax benefits compared to regular earnings.

To begin a SAYE scheme, the company must make an offer to their employees which states the amount of money each month the employees can save, the time period that they can save for as well as the stock price they will be able to purchase shares once the scheme ends.

If an employee decides to take part in this scheme, they can choose how much they want to save and the time period. At the end of the scheme, they will be able to either use the savings to buy shares or decide not to purchase shares and have their savings returned as a lump sum.

Conclusion

As you can see, there are many methods to giving your staff a share of your business. You need to choose the method that works best for your business as well as benefits your employees. When done correctly, the option of shares can be a major incentive for employees and can lead to many benefits that your company can reap the rewards of. When giving shares to employees you can use this as an incentive when recruiting, use it effectively to retain current employees as well as use as an incentivisation tool.

Whichever option you decide to go with when giving your staff a share, ensure you seek advice from your accountant beforehand. They can ensure that you choose the route that is most beneficial and tax-efficient for your company whilst ensuring it’s the best fit for you. If you are interested in adopting a share scheme, then please get in touch with the Wright Vigar Team.