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Since 2003 the way the UK's income tax regime applies to individuals who acquire shares in a company by reason of employment has been altered and updated. Whilst most advisers have been up to speed with this for some time now (even though the 2003 legislation has been amended several times since its introduction), client companies and their employees are much less aware of the implications of acquiring shares.
It is clear that if a company is proposing that senior employees should acquire shares in the company, both the company and the employee should have a clear understanding of the income tax (and national insurance contributions) treatment of the relevant investment before proceeding. This makes sense if the benefit of taking advice is to avoid nasty tax consequences for both employee and employer in the future. H M Revenue & Customs ("HMRC") have clearly indicated that this is an area of the UK's taxation regime to which they are prepared to devote substantial resource to recover lost amounts of tax due.
With a backdrop of incentivising employees (or perhaps planning for succession where major shareholders are considering an "exit" in the near future), companies should consider whether the use of share options is a more appropriate method for senior employees to take a stake in a company. There are several advantages of structuring an incentivisation arrangement by way of share options. An option can be both extremely efficient from a taxation perspective (for both the employee and employer) and also tailored specifically to individual and corporate circumstances. A number of recurring themes arise when considering the adoption of share option arrangements - for example, most company owners will be concerned about diluting their own shareholdings when options are exercised and employees need to consider (among other things) when they might exercise an option, whether there are any performance conditions attached to the option and their own income tax position.
Lupton Fawcett LLP has substantial experience of advising on and implementing a range of incentivisation techniques, whether these are "approved" by HMRC or otherwise. If a company is considering the acquisition of shares by a manager or employee, timely advice may prevent nasty tax consequences arising in the future. If you do decide to that share-based incentivisation is an appropriate structure for you then we can advise on and prepare the relevant documentation to carry this into effect.
For further information regarding this article, please contact Michael Hunter on 0114 252 1098 or email Michael using the hyperlink.
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