In early stage companies with high growth potential, Enterprise Management Incentive (“EMI”) schemes continue to be popular. These tax advantaged schemes, based on values agreed with HMRC, effectively give key employees a one-way bet on the success of their company. If the company doesn’t grow, they don’t have to exercise their options and its cost them nothing. If the shares over which they are able to exercise options have grown in value they are able to acquire the shares but without having to pay any capital gains tax (“CGT”) on the growth in value of the share whilst they have been under option. If they later sell the shares there is no income tax or NI charge, just an effective 10% rate of CGT on the overall profit they have made.
Our experience of looking to introduce share incentive schemes on a wider basis in SME companies has been mixed. It’s often the case that such a scheme for a lot of employees can be complicated and time consuming in terms of managing questions and expectations. If employees have a very small share of an option pool there is not a great incentive effect in practice. In many such cases a well-crafted cash bonus scheme that works against clear targets will often work much better. A lot of households have found their finances stretched in recent years and this can mean that some cash now by way of bonus is of more interest than a potential capital gain in some years’ time.
We continue to explore using employee benefits which come with tax breaks, but again these can come with a lot of administrative burdens. They also seem to be on the government’s list of things which they want to reduce in scope.
We are watching with interest the continued steady growth of the number of wholly and partly employee–owned companies. Such companies are owned by employees holding shares directly or through an Employee Ownership trust which holds the shares on behalf of the employees. These companies tend to have a very distinctive participatory culture where employees are very much engaged in the overall welfare of the business. We expect this sector to continue to grow.
It is apparent that there is no one size fits all solution. The right kind of scheme needs to fit the culture of the company and be appropriate to the stage the company is at. It also needs to be well put together in terms of trust law, company law, employment law and tax law. What is clear is that having the right scheme in place can be very beneficial to a business, whereas the wrong scheme will, at best, be of no real effect at all.
For further help or advice, please contact Lupton Fawcett’s Corporate Director, Jonathan Oxley or a member of the Employee Shares Team.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.