Incentivising Employees LONDON TECHNOLOGY WEEK Speaker: Catherine Gannon Solicitor, Chartered Institute of Taxation (CTA)
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Incentivising EmployeesLONDON TECHNOLOGY WEEK
Speaker: Catherine GannonSolicitor, Chartered Institute of Taxation (CTA)
Introduction
1. Alternatives to cash
2. Ideas on the design of share awards
3. Implementation
Overview
• Option, phantom option or shares
• Taxation
• Dilution
• Reporting obligations
Incentivisation
WHAT IS BEST?
• Costs of implementation vs. tax savings• Employee involvement in business• Only incentivises if properly understood
Example: Unapproved options
Year Event Tax 2013
Option granted over 1,000 Shares: exercisable at £2 each
No tax charge on grant
2015 Option exercised over 1,000 Shares:
now worth £20 each
Combined income tax and NIC charge +Exercise price £2,000 payable
2015 1000 Shares sold: Income tax on “gain”
1000 x £20 per share Proceeds £20,000 Exercise price payable (£2,000) Gain £18,000
Combined rate of income tax and NIC of 54.59%
(£9,826)
2015 Net proceeds retained £8,174
Example: Employee Shares
Year Event Tax 2013
Employee receives 1000 shares worth £2 each
No income tax or NI charge on grant
2015 1000 Shares sold at £20 No CGT on “gain”
1000 x £20 per share Proceeds £20,000 CGT payable NIL
2015 Net proceeds retained £20,000
Year Event Tax 2013
Option granted over 1,000 Shares: exercisable at £2 each
No tax charge on grant
2015 Option exercised over 1,000 Shares:
now worth £20 each
No tax charge on exercise but exercise price of £2,000 payable
2015
1000 Shares sold:
Tax on “gain”
1000 x £20 per share Proceeds £20,000 Exercise price payable (£2,000) Gain £18,000 Annual exemption £11,100 (based on 2015/16
allowance) Taxable gain(11,100)£6,900
CGT payable (£6,900@10%)* £6902015 Net proceeds retained £17,310
Example: EMI
Year Event Tax £ 2013
Phantom created over 1,000 notional shares Value £2 each
NIL
2015
Phantom paid out over 1000 notional shares
Income tax on “gain”
1000 x £20 per share Payment 20,000 Less notional exercise price (2,000)
Gross payment to employee 18,000
Income tax @45%Employee’s NI 2%
(8,100)(360)
2015 Net proceeds retained by employee
Employer’s NI bill @13.8%
£9,540
£2,484
Example: Phantom Option
Going to South of France
Year Event Tax £ 2015 Phantom paid out Income tax and NI on gain
Employee left with Employer pays NI
9,5402,484
Unapproved option exercise Income tax and NI on gainEmployee left withEmployer pays no NI if election made(Employee retains more if no NIC election but employer left with NI charge)
8,174
EMI option exercise CGT on gainEmployee left with 17,310
Employee Shares sold No CGT on gainEmployee left with 20,000
Going to South of France
Employee Owner shares• New status available from 1 September
2013• Shares between £2,000 and £50,000• Employees give up rights – flexible
working, training, redundancy pay
Since 2013Employee Shares
Employee Owner shares• Shares free of CGT• NICs and Income Tax not chargeable on
first £2,000• Employee must not pay for shares• Advice from a relevant independent
adviser
Employee Shares
Employee Owner shares• Time delay • Must not have a material interest (25%)• Ex-employee buy-back
Employee Shares
Qualifying Companies- Three key requirements:
1. 51% subsidiaries2. Gross assets test £30M3. Number of employees < 250 including part
timers
EMI options
Qualifying Employees
- Two key requirements: 1. 25 hours per week or 75% of time2. Must not own 30% or more of total share
capital
EMI: who can get options
Financial limit
- Two key requirements: 1. Market value per employee £250,0002. Total share value £3M
Time limit – 10 years
EMI: Financial limit
• Trading company
• Officer or Employee
• Lifetime Limit
• 5% voting shares
Entrepreneurs' Relief
EMI exceptions
• Do not need to hold 5% minimum
• 1 year shareholding requirement replaced with 1 year EMI option holding requirement
• Do not need to exercise pre-exit
EMI and Entrepreneur's relief
• EMI - corporation Tax deduction equal to gain even though no income tax payable by employees
• Phantom options – charge to P&L as if salary• Unapproved options – match to income tax
charge
Corporation Tax
• If don’t qualify for EMI
• Don’t benefit from relief from NI and Income Tax
• Entrepreneur’s Relief additional benefits do not apply
Unapproved Options
• Need Shareholder’s Agreement
• Good Leaver/Bad Leaver provisions essential
• Different classes of shares
Shares – Not Options
• Right to receive cash
• Can be conditional on still being employed
• Capped or payable in shares
Phantom Options
Implementation - ‘core’ details
• Company/group
• Employee(s) / non executives / consultants
• Articles
• Share capital
• Constitution of the company and powers
Current Shareholders
• What are the % of current holdings?
• Informal promises?
• Would a different class be beneficial?
Current Shareholder
• What are the % of current holdings?
• Informal promises?
• Would a different class be beneficial?
Any questions?
How can we help you?
Visit www.gannons.co.uk for further informationhttp://twitter.com/#!/gannons_law
This information is designed to provide a summary of the issues addressed. Therefore, it is not intended as a detailed commentary on the relevant law and any comments made should not be acted upon without first taking specific legal advice.
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