Whilst this scheme is great news for the majority of companies and will enable businesses to get going again as soon as life returns to normal, it will not be appropriate in all circumstances. Firstly, in order to access the scheme the employee must do no work for the company other than training and voluntary work; some staff may need to work part-time in businesses which can’t open their doors and are thus ineligible. Secondly the furloughing scheme may not work economically for employees earning over £37,500 with the business possibly expected to make up any earnings above this.
Accordingly, without cash inflow some businesses may find it difficult to pay salaries in cash in full right now, and it may be that some staff may be asked to accept a temporary waiver of part of their salary, a deferment of some of the salary/bonuses until things improve, or to go part-time. Any employer needing to go down this route may wish to consult with their employment lawyers as to what can be done. However, in return, a company employer may wish to offer non-cash incentives to staff at this difficult time, such as offering options over shares in an EMI scheme.
The benefit of the EMI scheme is that options over shares can be granted to key staff today, at today’s value, which can be agreed with HMRC. Assuming the company grows in value over time and the employee stays with the company, the growth in value is immune from employment taxes and is instead only subject to capital gains with the capital gains tax arising only when the employee subsequently disposes of their shares. The current main rate of CGT is 20% which is substantially less than the effective rate of employment taxes (income tax plus possibly NICs). If the employee has held their options for more than two years and the gain is less than £1m, that gain is taxed under Entrepreneur’s relief at 10%.
It is also possible to award an EMI share option at a discount to the company’s value, at the date of grant, so the employee is ’in the money’ from day one. The grant of an EMI option has no tax consequences (and therefore no initial cash outlay). Instead, when the option is later exercised the initial discount (and only that discount) is subject to employment taxes. All of the growth in the value of the shares, since grant, can still qualify for the EMI tax advantages and be taxed as a capital gain as described above.
The EMI scheme is not available to all companies; for example, the company must be independent and carry on a qualifying trade, and the employees concerned must work for the company 25 hours per week or 75% of their working time which can exclude non-exec Directors. In these circumstances alternative share-based payment methods, such as growth or flowering shares, could be considered. As well, if there is unlikely to be any exit event for the business in the short to medium term then further discussions would need to be had as to how any employee would receive value from the award. EMI awards are only available to companies and not for employers who operate as a partnership or LLP.
Please note that the tax advantages do not work if deferred salary is settled in shares/share options as HMRC guidance advises that waiving salary already earned, or accepting an alternative to cash, is still taxable as earnings on the original amount. Any award must be given for commercial reasons, to retain and/or motivate an employee rather than any other purpose.
haysmacintyre can assist with the full package of setting up an EMI or other share incentive scheme, from agreeing the valuation of the company’s shares with HMRC, drafting up the scheme rules and lodging the award with HMRC through the company’s online gateway.
If this is something which is likely to be of assistance to your business in this unprecedented period of uncertainty, please contact your usual haysmacintyre contact or email CV19@haysmacintyre.com.