Insights

If you are looking for new ways to reward and motivate key members of staff in 2017, an employee share scheme is a tried and tested option. Giving employees shares or share options has been shown to improve retention levels and boost loyalty, plus increase overall performance amongst employees who are motivated by the opportunity to participate in the overall success of their employing companies. Awarding shares is also a great alternative to giving staff a financial bonus.

It is possible to simply give company shares to employees at any time but if the shares are not given within the structure of an HMRC approved and tax advantaged scheme, income tax, and often national insurance contributions, will be payable.

Alternative tax advantaged share schemes

HMRC offers a number of tax advantaged share schemes for companies, and to date there have been two schemes which are mainly suitable for small to medium sized companies - the Enterprise Management Incentive (EMI) share option scheme and the Employee Shareholder Scheme (ESS).

HMRC does offer other tax advantaged share schemes such as the Company Share Option Plan (CSOP), however this tends to be favoured by larger companies and is more costly and complex to administer.

For many years, the only tax advantaged share scheme which proved suitable for many SMEs was the EMI. However, because not all types of business qualifies for this scheme, many SMEs were left with no real tax incentivised alternatives. The introduction of the ESS on 1 September 2013 was therefore very welcome as it offered a viable alternative to the EMI. However, the ESS tax incentives were reduced in the March 2016 budget and with effect from 1 December 2016 have been removed entirely.

What is now the best tax advantaged share scheme for SMEs?

Effectively, we are back to where we were before the ESS was introduced. The EMI share option scheme is the scheme of choice for qualifying companies; it remains the most cost effective and tax efficient way for these companies to offer employees a chance to participate in their company’s success. Not all companies qualify for the EMI scheme however.

How does the EMI share option scheme work?

Firstly, it is important to note this is a share option scheme rather than an award of shares, as with ESS or CSOP. Within an EMI scheme, the employee is granted options to acquire shares in the future for their current market value. The option can be exercised at a time agreed in advance. This might be within a matter of weeks or months; on certain targets being met; or immediately before a trade sale, as required.

No tax is payable on grant of the option or on exercise, providing the agreed market value is paid for the shares. On disposal of the shares, capital gains tax is payable on the difference between the sale proceeds and the exercise price. This is often at the reduced rate of 10% because entrepreneurs’ relief (ER) is often available. The normal rates of capital gains tax for other assets are 20%, or 28% for residential property.

At a glance: Company qualifying criteria for EMI

• Only available for companies with assets up to £30million;
• Only available for companies having fewer than 250 employees;
• The company must not be a 51% subsidiary, or otherwise controlled by another company;
• If the company has subsidiaries, they must be at least 51% owned;
• Only available for companies with ‘qualifying trades’ having a permanent establishment in the UK. Qualifying trades exclude dealing in land, commodities, futures, shares, securities or other financial instruments, banking, insurance, money-lending, debt factoring, hire purchase, financing or other financial activities, leasing, receiving royalties or licence fees, legal and accountancy services.

At a glance: Individual qualifying criteria for EMI

• The employee must be employed by the company or a qualifying subsidiary;
• The employee must work for the company on average at least 25 hours a week or, if less, 75% of their working time;
• They must not control more than 30% of the ordinary share capital together with their associates.

At a glance: How EMI tax relief is calculated

• Corporation tax relief is available to the company when options are exercised, based on market value less exercise price;
• No income tax or NICs are payable by the individual on grant of the options or on exercise, providing the agreed market value is paid on exercise;
• Entrepreneurs’ relief (ER) accrues from the date of grant of the options and no minimum shareholding is required for this purpose;

In summary, EMI remains a very popular and useful share option scheme for qualifying companies, and is an excellent way to motivate employees to perform well and participate in the financial success of the company. Unfortunately, SMEs which do not carry on a ‘qualifying trade’ are once more left without a viable tax incentivised alternative available to them.

If you are interested in offering a tax efficient, HMRC approved share scheme for employees in 2017, please contact Lesley Stalker by emailing las@rjp.co.uk.