Cash is always good, whether through salary increases or bonuses but, in times like the present, cash can be a precious resource which needs to be conserved.
Also, cash payments (or any benefit treated as being taxable as if it was cash) can be expensive by the time they have been grossed up to cover the related PAYE and National Insurance liabilities.
So, I am often asked, can employees be given some shares, whether to give them a sense of ownership, a potential dividend income or even a lump sum if the company was sold.
The answer is yes, but it needs careful thought. It can be the wrong thing to do. If done badly it can actually be demotivating for employees, complicated and lead to disputes. Done with proper care and attention it can be a big win for both employees and employer. It is important to understand what will actually motivate employees positively and to ensure that any shares put under option of issued to shareholders are sufficient to do the job. You can get it wrong by being over generous or not generous enough. It’s also important to ensure that you retaining control and that minority shareholders don’t become a disproportionate nuisance.
A key issue is that tax legislation generally looks at the value of anything received by an employee by reason of their employment as if they have received cash of an equivalent value. So if you just give shares to an employee, assuming they have a value, you will also probably be giving them a tax bill.
However there are a number of “HMRC approved” share option and incentive schemes which attract more favourable tax treatment, the most popular and tax efficient of which are called Enterprise Management Incentives (EMI for short). EMI option schemes best suit early stage high growth companies but can also be effective in established businesses. Done properly they avoid income taxes and the employee will pay the lowest current rate of Capital Gains Tax (effectively 10%) if they eventually sell their shares.
Broader structures that encompass employee trusts and majority or total ownership by employees are also available and have proved to be powerful and successful structures in some companies.
If you are thinking it is worth exploring, don’t make any promises to employees before speaking to advisers who are experienced to the field. They can help you decide if it is right for your company and is so what is the best scheme and structure for you.
Jonathan Oxley is an experienced Corporate Finance Partner and Lupton Fawcett’s Chairman. For help or advice on this article, corporate law generally or Start-Up/Scale-Up, please contact Jonathan by using the contact information above.
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.