Employee Share Schemes

Employee shares schemes are one of many ways to introduce

employee ownership within your company. This note will outline a number of different employee share schemes that could by implemented to incentivise current key employees as well as attract new employees. The motivations and key drivers behind each incentive arrangement differ from company to company but the main reasons companies typically introduce an employee share scheme are:

  • to incentivise and reward current employees,
  • attract new employees, or
  • align employee and shareholder interests.
Employee Share Schemes

What are they?

An employee share scheme is a way of sharing company ownership with your employees. Ambitious smaller companies sometimes need to find a way to compete with large, established businesses for talented employees. Employee shares schemes can allow such companies to grant share options (a right to acquire shares in the future, at a fixed price) to key employees on a tax-advantaged basis, such that employees who invest their time and efforts in the company can benefit along with shareholders on a future exit or other realisation event.


Share schemes come in various shapes and sizes. Each one works slightly differently, and most can be customised to suit your specific needs. With each of the employee share schemes outlined below it is possible to design a scheme that meets your desires:

• whether this by an exit-only share scheme such that employees will only become shareholders upon a liquidity event such as third-party sale or,

• performance related such as time served or sales targets.

Why do it?

As briefly mentioned, the introduction of an employee share scheme can be key in retaining and incentivising current staff as well as attracting key individuals to the company.


Other advantages of introducing such schemes also include:

• Tax advantages – Providing certain conditions are met, the individuals will have no income tax or national insurance liability. Upon sale of the shares, the employee may also be able to benefit with a reduced rate of capital gains tax.

• Aligning employee and owner interests – shares or share options can help employees to start to think and operate as business owners by having a genuine a stake in the capital value of the business.

• Psychological benefits – offering shares can have a powerful impact on employee behaviour and can provide much more of a tie-in to the business than salary and annual bonuses.

• Performance improvement – academic research supports the view that businesses with employee ownership or where employee have a potential future stake perform better than those do not offer share participation.

• Succession planning – share schemes can act as a means of bringing new talent through to an ownership and management roles and transition a change of ownership from old to new management. The upside of employee shares can also be used to assist management buy-outs.


Types of HMRC Approved Scheme

Employee share schemes can be split into two different categories, HMRC approved share schemes and non-HMRC approved schemes. HMRC schemes usually have greater tax benefits, however they also have strict criteria that must be satisfied to gain these tax benefits.


HMRC approved schemes are typically more tax efficient than an non-HMRC approved scheme. In practice, HMRC approved schemes mean that HMRC will agree share valuations for the purpose of specific awards in advance, allowing certainty for companies as to the future tax position. Often these valuations will be at a significant discount to take account of the small holdings employee share options are usually granted over and the likelihood that any future liquidity event is some way down the line.


The most common type of employee share scheme is an enterprise management incentive known as EMI.

EMI

An Enterprise Management Incentive (“EMI”) scheme is a HMRC approved employee share scheme that is available to most trading companies. EMI schemes allow employers to grant share options to key employees in a tax efficient manner. Allowing companies to reward employees for their efforts within the business and/or to retain and incentivise key staff.


EMI schemes are very popular due to their tax effectiveness for both the company and the individuals involved. EMI schemes are approved by HM Revenue and Customs (“HMRC”), in practice this allows the company to reach an agreement with HMRC on the value of the options to be granted. Agreeing a value with HMRC is beneficial as it certifies the future tax position. Due to their tax efficiency, there are various conditions that must be met by the employer, employee, and the options themselves which are summarised below.

Conditions

Company

An EMI scheme can be implemented in quoted and unquoted companies with gross assets of £30m or less. The company or group must carry on a qualifying trade. Examples of trades which do not qualify include leasing, farming, financial activities and property development.


The EMI scheme can only be implemented at the highest level, as an EMI scheme cannot be introduced into a company which is controlled by another company.


Employees

EMI options can only be granted to employees who are required to work for at least 25 hours a week, or, if less, at least 75% of their working time must be for the company issuing the options.


Employees who have a ‘material interest’ of more than 30% of the share capital before the options are granted are excluded from participation.


Share Options

Options must be granted to employees or directors over ordinary shares that are fully paid and not redeemable. The shares can, however, be subject to restrictions.


Only EMI options of less than £250,000 worth of shares per individual will qualify for EMI tax treatment.

CSOP

Company Save Option Plans are another common form of HMRC approved scheme, they are often used in companies which EMI is not available.


This gives employees the option to buy up to £30,000 worth of shares at a fixed price. The maximum value of shares over which a participant may hold subsisting CSOP options is £30,000 (calculated using the market value of the shares on the grant date).


The employee will not pay Income Tax or National Insurance contributions on the difference between what they pay for the shares and what they are actually worth.


Conditions

Similar to EMI schemes there are a number of legislative conditions that need to be satisfied.


Company

The company whose shares are under option must be independent, i.e., not under the control of another company. However, the company can be under the control of another company providing the option shares must be listed on a recognised stock exchange.


Employees

The scheme is available to both:

  • Company or group employees, and
  • Full time directors (directors need to work full time (at least 25 hours a week) to qualify.


The employee and their associates (immediate family, business partners, and others) must not have a material interest (30%) in the company.


The employee cannot leave the company or exercise the option before the third anniversary of the grant date.


Share Options

The shares under option must be ordinary shares, non-redeemable and fully paid up. As outlined above there is a minimum three-year vesting period for CSOP shares. The shares can, however, be subject to restrictions.


Only CSOP options of less than £30,000 worth of shares per individual will qualify for CSOP tax treatment.


There are a number of other share schemes that could be implemented into your company or group. EMI schemes are the most common type of employee share schemes but further information on alternatives can be given if required.

Process

With the share schemes outlined above, the process is usually split into the following steps:


  1. Initial Call – We would seek to arrange an initial call with you to further explain the different types of employee share schemes and answer any initial questions you have and also learn about you so we can advise on which scheme will be most beneficial for you and your company.
  2. Initial report – After the initial call we would produce a detailed note on the different share schemes that would be available to your company, outlining the scheme and the tax implications for both the company and the employees.
  3. Follow up call – We would then seek to arrange a follow up call to go through any further queries you have, once we have collectively decided on the optimal route for your company we would then liaise with the appropriate corporate lawyers to discuss the share scheme structure.
  4. Data gather – Once you have decided on the best scheme for your company as well as beginning to consider which employees you may wish to offer the scheme to, we would then send you an email with an information request. This will typically be a request for your full accounts and details of any external investment, this information will be used to draft a valuation report to determine the price of the share options for employees
  5. Valuation Report: Draft and Discussion – Hamilton Blake would complete a company share valuation for any share scheme and send this across to you for review before submitting to HMRC where appropriate. HMRC will then typically either agree to the valuation or ask further questions within 2-3 weeks.
  6. Valuation Report to HMRC and legal documentation – While we are awaiting a response from HMRC, the appropriate legal documentation for the scheme will be drafted by the corporate lawyers.
  7. Grant of Option – Once we have the approval of a share price with HMRC (if appropriate) and the necessary legal documentation drafted we would then grant the option to the employees.
  8. Immediate and Ongoing compliance – We would then complete any immediate or ongoing registration of the scheme with HMRC.
  9. How can Hamilton Blake help?
  10. We can help with structuring the terms of an EMI scheme, preparing the documentation, agreeing a share valuation with HMRC, and taking you through the process to grant options to selected employees.


We are able to help with all aspects of employee incentives and employee share schemes, including:

  • selecting the right type of arrangement for your business and employees;
  • producing share valuations and agreeing these valuations with HMRC were appropriate;
  • liaising with appropriate corporate lawyers,
  • report the grant of employee share options to HMRC if appropriate (this is typically only necessary for EMI options)
  • reporting employee incentive activity to HMRC at the end of each tax year.


Please do not hesitate to contact us should you have any queries.