Incentives can help keep staff on board.
Attracting and retaining key employees is an essential part of growing a successful business but it can also be a challenge for entrepreneurial companies. Using share-based incentives to complement a larger remuneration package allows employees to share in the capital growth of the business by aligning their interests with the employer, whether that is focusing on the growth strategy or driving the company towards an exit.
Enterprise management incentives (EMI) are a popular model for achieving this goal.
EMIs are HM Revenue and Customs (HMRC)-approved, flexible share option plans aimed at helping smaller independent companies to recruit and retain the high-calibre employees who are key to the future success of the business.
They also reward key management for taking a risk by investing their time and skills to aid the company's growth, while putting them at the heart of the success they've helped to generate.
An "exit only" EMI can be used whenever the exercise of options is conditional on a predetermined exit event - i.e. the sale of company. This can be beneficial for companies as it keeps minority shareholders to a minimum and while employees are option-holders, there is no requirement for them to be party to shareholder decisions.
There is no income tax or National Insurance due on the grant or exercise of EMI options, assuming the exercise price is not less than market value at the time of the award.
A further benefit of an EMI is that entrepreneurs' relief is available on the disposal of the option shares, provided these were granted 24 months prior to a disposal.
There is no 5% shareholding or voting requirement for shares acquired via an EMI.
Given the extra complexities added to the qualifying conditions for entrepreneurs' relief by the Finance Act 2019, EMIs can be an ideal way of securing this tax break.
But, due to their size or the activities undertaken, a company may not meet the conditions required to qualify for an EMI option plan. Many of the other HMRC-approved share plans that exist are generally for the benefit of all employees of the company and, although useful, do not provide the discretion to incentivise only key members of the management team who are crucial to the growth and success of the business.
Other tax advantaged incentives have, therefore, become popular to help these businesses achieve their desired level of growth and provide shareholder value.
The good news is that alternatives do exist, and firms are increasingly focused on the use of growth shares as an incentive.
Although not an HMRC-approved plan, growth shares offer a tax incentive - all growth in value from the date of award is subject to capital gains rather than income tax.
Growth share plans generally involve the creation of a new class of stock which are not linked to the value of the company - preserving that for the existing shareholders.
The right to participate in an exit will be linked to the performance of the company and typically only kicks in once certain pre-determined hurdles are achieved.
Due to the restrictions placed on growth shares, they typically have a low value when they are awarded - making them affordable, with minimal income tax and National Insurance implications.
Growth shares are a specialised area and complex valuation methods are often necessary, so expert advice is essential.
Lynn Wilson, director in corporate tax, Anderson Anderson & Brown LLP
CHALLENGE: Incentives are essential to keeping key staff, but can present problems for firms
|Printer friendly Cite/link Email Feedback|
|Publication:||The Press and Journal (Aberdeen,Scotland)|
|Date:||May 20, 2019|
|Previous Article:||Authentic attraction.|
|Next Article:||Finalists given warm welcome at Siberia.|