Harvard Business School loves the idea of employees stakeholding in their business, and so does the Government, by blessing certain schemes with generous tax breaks.
Received wisdom is that employees who stand to gain from their company’s success are more highly motivated, more productive and more loyal to the company, and we have advised numerous businesses on how they can implement an appropriate scheme. These range from the issue of shares to employees, the granting of options, and the establishment of “phantom” schemes. Each of these schemes has pros and cons, covering issues of taxation, complexity of administration, cost of establishment and the actual benefit given to employees.
From the employees’ perspective, the two main questions are:
- Do I get to participate in the company’s equity value? and
- Do I get to participate in the company’s profits?
These questions have to be tackled differently in every company: for example the emphasis for a plc is naturally different from that of a private company.
We take care to understand the needs of the company before implementing any scheme, to make sure that these criteria are most effectively balanced.
Since Gordon Brown introduced Enterprise Management Incentive (EMI) schemes in June 2000, they have proven very popular. We have acted for many companies in setting EMI schemes up, and they appeal to those companies who wish to offer a share incentive to their staff in a tax efficient way. The key to EMI is the availability of Capital Gains treatment from the time a share option is granted, as opposed to the time when the shares are purchased under option schemes for a traditional approved or unapproved scheme. This means that employees should find gains are charged to capital gains tax at an effective rate of 18% rather than 40% for income tax.
We believe in exit driven EMI schemes – schemes that incentivise employees to stay with the company to a sale or a flotation.
Our role in producing EMI schemes is as follows:-
- To work with a company and its tax/auditing advisors to ensure that the company is a qualifying company for EMI.
- To explain the tax issues to management and employees.
- To produce an EMI Deed that matches the incentivisation profile required by our client.
- To review and amend the Articles of Association of the company as appropriate, to deal with the cases when employees may hold shares as well as options.
- To work with the company’s tax and auditing advisers to submit a valuation to the Revenue for EMI purposes.
- To produce all the Company Law paperwork required, and file it with the Revenue.
- To file the appropriate forms with the Revenue once the scheme has been adopted
- To project manage the process throughout.
Revenue Approved Schemes
Here, we will analyse whether the scheme is appropriate for the company’s needs, draft the scheme rules and check compliance with the requirements of the legislation.
We will produce the necessary board and shareholder resolutions to implement the scheme, and work with the company to achieve the appropriate filing with the Revenue.
Sometimes, it is not appropriate or possible for a company to introduce either a Revenue approved scheme or an EMI scheme. Here, we can work with the company to produce an unapproved share option scheme, and work with the company and its tax advisers to ensure that the best tax profile possible is obtained.
Our role will be to:-
- Work with the company to analyse whether the scheme is right for the company.
- Produce the draft documentation.
- Discuss it with management.
- Produce the appropriate amendments to the company’s Articles.
- Produce the necessary board and shareholder resolutions.
- File all documents at Companies House as appropriate.
- Project manage the process.
Employee Share Ownership Trusts
We have experience of producing employee benefit trust deeds, working in conjunction with tax advisers, either as part of an employee share scheme, as part of arrangements to repurchase departing employees shares, or generally as part of an employee incentivisation programme.
Employee Warehouse Schemes
Often, a key employee will leave a company, due to ill health or just to move on to pastures new. Employee shares may need to be repurchased, but cash may be tight and there may not be sufficient profits to allow the company to lawfully repurchase the shares. Here, introduction of an “employee warehouse trust” can assist in the process, and we have long experience of producing such trusts and working through the various issues around the repurchase of shares from a departing employee.
Employee Dealing Rules
Sometimes, companies with many employee shareholders wish to facilitate dealing in the shares on an annual or biannual basis. We have long experience of producing the appropriate rules and regulations covering this “internal market”, and can advise on the implementation of such a scheme, the documentation necessary to implement it, the necessary amendments to the Articles of Association and the tax issues around it.
Sometimes, a phantom scheme is the best way forward for a company to incentivise its staff. Staff will receive a bonus linked to dividend and/or capital growth. We will advise the company in conjunction with its tax advisers on the tax issues involved in introducing a phantom scheme, and produce the necessary documentation to make sure it is set up properly and efficiently.
We have long experience of assisting clients to produce documentation to reflect their bonus scheme wishes. Bonus schemes need careful thought, to make sure that the contractual paperwork fits the client’s wishes and deals with issues clearly and comprehensively. We pride ourselves on listening and interpreting what our clients want.