News

Budget boost for EMIs

Thu 13th March 2008

Alastair Darling announced that, from 6th April 2008, the upper limit on the value of shares that can be offered under an EMI scheme will increase from £100,000 to £120,000. This will allow more high level executives to take their rewards in a tax-efficient manner. It also indicates the government’s continuing support for this important and attractive incentive. More than 8,000 companies have now granted EMIs to a total of well over 100,000 employees.

Having given with one hand, Darling took away with the other. Companies with 250 employees or more will not be able to offer EMIs as from the date of Royal Assent to the Finance Bill 2008 (usually in July following the Budget). This restriction will affect very few companies, however, since those with gross assets in excess of £30 million are already excluded. Part time employees are counted on the basis of the number of hours they work as a proportion of a "standard" 35 hour working week.

Oddly, Darling also announced that companies engaged in shipbuilding or the production of coal or steel will be unable in future to offer EMI options. Given the gross asset test just mentioned, we think that very few if any companies will be affected by this restriction, especially as the shipbuilding restriction applies only to larger vessels. It looks as though this measure was introduced for technical reasons, to accord with European Directives.

It may have been plain sailing for employee share schemes, but disquiet continues to grow within sections of the Labour Party in respect of other of Darling’s measures, in particular the abolition of the 10 per cent. income tax band. We predict further trouble ahead for the embattled Chancellor...

Research backs EMI effectiveness

Fri 29th February 2008

Nearly 80 per cent. of employers offering employee share options under the Enterprise Management Incentive (EMI) say that the scheme helped them retain key and/or skilled employees and improve staff motivation, according to research commissioned by HM Revenue & Customs from Ipsos Mori. The research also found that more than two thirds of employers offering EMI options said that the EMI had helped improve company performance.

Four in five employers who have offered EMI options will continue to do so - many of the remainder are prevented only because they have grown to the point where they are no longer eligible. Employees, meanwhile, feel that the EMI’s main impact is in engendering a feeling of ownership as well as providing tax efficient rewards.

None of this comes as surprise to our share scheme designers at RM2 who regularly receive positive feedback from employers about the success of the Enterprise Management Incentive. Much of the scheme's approval derives from its flexibility and the ease with which employee understand the benefits. There is little or no sign that proposed changes to capital gains tax rules (see previous post) will discourage companies from offering tax-advantaged employee options such as the EMI or approved company share option plan (CSOP).

Free factsheets on the EMI, CSOP and other tax-advantaged employee share incentives can be found at http://www.rm2.co.uk/factsheets. Alternatively call us free at 0800 043 8150 and ask us as many questions as you like!

New CGT rules and share schemes

Fri 25th January 2008

Alastair Darling's new CGT rules offer some crumbs to small business owners but have little effect on employee share schemes.

The new rules take the form of a relief of 4/9ths of gains on the sale of trading companies up to a limit of £1 million. A gross gain of £1 million will therefore become £555,555 on which tax of 18 per cent. will be £100,000 - an effective rate of 10 per cent. The £1 million is a lifetime limit. The relief is restricted to those holding 5 per cent. or more of the shares and votes of a company and so most employee shareholders will be unaffected. It will also not apply to rights over shares, such as EMI Share Options, SAYE Share Schemes or Company Share Option Plans.

Predictably, no-one applauded Mr Darling's statement. Proshare, the leading lobbyists for employee share schemes, said they were "disappointed". The Federation of Small Business and the CBI joined the chorus of criticism and the Tories described the measure as a "text book example" of how not to introduce a tax change.

Nevertheless, employee share schemes continue to offer good tax value. Government backed schemes, such as the EMI, SAYE and CSOP share option schemes, will still treat gains as capital and not income, thus saving participants large amounts of tax on exercise and also saving their employers substantial sums in National Insurance. Participants in the Share Incentive Plan will continue to pay no tax at all on shares held in the plan for five or more years.

If you would like to know more about the tax advantages of employee share schemes please call us for free advice on Freephone 0800 043 8150 or explore our website.

£12m SAYE bonanza for HBOS staff

Fri 11th January 2008

HBOS has announced a payout of approximately £12m to its workforce of almost 14,000 staff following the maturity this week of its SAYE ("sharesave") share option scheme.

The average participant benefited to the tune of about £1,000. This is well within the current capital gains tax exemption of £9,200. Assuming participants have not utilised their exemptions with other gains, this means that their SAYE benefits will be tax free.

Sharesave schemes permit employees to save between £5 and £250 a month over 3 or 5 years. At the end of the savings contract they receive a tax free bonus. They can use the proceeds of the savings contract, plus the bonus, to acquire shares in their employer, usually at a price equal to the price at the start of the contract less 20 per cent. They therefore benefit from any rise in share price that has taken place over the contract period, with the 20 per cent. thrown in as an endowment.

A big advantage of an SAYE scheme is that employees can ask for their money back at any time up to the end of the savings contract. They are therefore insulated from risk over this period. RM2 has implemented and administers a number of SAYE schemes and we have found that one of the most valued aspects is simply the provision of the savings contract - employees say that this has allowed them to accumulate savings that otherwise they would not have made. For further details of SAYE schemes, you can download a fact sheet from this site, or just contact us.

More companies to escape options audit

Wed 9th January 2008

Regulations coming into force in April will allow more companies to qualify as "small", and thus escape the requirement to expense their share schemes to profit and loss account.

Normal accounting rules require that companies report a notional charge against profits in relation to the value of their share based employee incentives. This has never made any sense, since employee share incentives are a cost to shareholders, not to companies. However the good news for companies qualifying as "small" is that, if they choose to adopt the accounting standard known as FRSSE (Financial Reporting Standard for Smaller Entities) they do not have to report an expense for their employee share schemes.

From 6th April 2008, a company can qualify as "small" if it satisfies at least two of the following criteria: turnover of less than £6.5 million (up from £5.6 million); assets of less than £3.26 million (up from £2.8 million) and no more than 50 employees. These changes should allow a significantly larger number of companies to avoid the unecessary and burdensome accounting standards in relation to employee share incentives.

Contact us for free advice on the implications of this change for your company.

No equity? I'm leaving!

Tue 8th January 2008

Leading City firm Close Brothers is suffering defections by senior staff as rumours grow of an imminent takeover bid. Five member of the investment trust team and the head of the group's European private equity team are among those to have left recently.
According to insiders, a key reason is that staff are disaffected by a lack of long-term share options or other equity incentives. The Times quotes one defector this morning as saying "it's a good robust firm that has lost its way culturally and has lost a lot of senior talent as a consequence." It seems that the one thing you can't do with City talent is hold back on the equity compensation.

Revised ABI Guidelines

Mon 10th December 2007

In recent years the ABI have chosen the month of December to issue revisions to their guidelines for executive remuneration.

This year, as usual, there were a number of refinements and additions. These included a requirement that, if there are changes to employee share options or other share incentives, the company must provide revised estimates of the expected present value of the employee benefit. Companies should state not only how many shares are likely to be used, but from where these shares will be sourced (e.g. existing shares, new shares or treasury stock). If there is a change of control, share options, LTIPs and other equity-based incentives should vest only in relation to the performance achieved up to that point and not in relation just to the passage of time.

There is also a surprising requirement that the calculation of total shareholder returns in relation to employee incentives should be undertaken by reference to short rather than long periods - a stipulation that some practitioners believe will create distortion.

Details of the existing guideleines can be found in our publication "Employee Share Schemes - a Guide for Directors", here

This year, however, the ABI have not been content to add to and refine their guidance. The cover letter issued with the guidelines itself contains further stipulations. These include the (perhaps obvious) stricture that employee options, share based rewards and other incentives should not be "greater than necessary". Where there are combined performance targets for the vesting of options, LTIPS etc, the ABI seem to indicate that normally all such targets should be achieved together rather than one or the other. The value of share based employee rewards for minimum performance should not be significant in relation to salary. But the maximum potential value of share incentive plans should not be so large as to cause executives to take unnecessary risks.

Non-execs favour pay in options

Wed 28th November 2007

A big majority of non-executive directors at unlisted companies think they should receive shares or options as part of their pay, according to a Financial Times report (26th November). This contradicts the view that providing non-execs with shares or options would affect their independence.

Only around one fifth of privately owned companies with fewer than 50 staff have non-executives. This report suggests that a good way for smaller companies to attract non-executive talent, while saving on cash costs, would be by means of share based incentives.

Practitioners lobby for end to tax trap

Thu 8th November 2007

The Employee Share Ownership Centre and Clifford Chance are leading calls for a change in the tax rules that apply to share schemes when a company is taken over.

Often, when a company is acquired, employees will cash in their share scheme benefits and the company will receive corporation tax relief on the value passing to the employees. However if the company is already under the control of the acquiror, any tax relief may be lost. This is because the relief depends on the shares in question being qualifying shares. Shares are not qualifying shares if they are shares in a subsidiary of a holding company, unless that holding company is listed on the main London Stock Exchange (or an overseas "recognised" exchange.

If, therefore, an employee exercises his option after a change of control involving an unlisted acquiror, any corporation tax relief that may have been available is lost. Many companies are unaware of this rule and as a consequence the Treasury is able to keep its hands on large sums of money that otherwise would have been paid out in tax relief.

In many cases, even if the problem is identified in time, nothing can be done to avert it. This is because option agreements often contain a provision that exercise may take place only after a change of control can take place. HMRC wil normally accept, in relation to Enterprise Management Incentive schemes (EMI share options) that the rules can be changed to permit exercise immediately before the change of control. However this is not possible with other forms of option such as SAYE (Save As You Earn) share options.

This is a particular problem with certain private equity deals where the ownership structure post-acquisition may involve a controlling corporate entity (or it may look that way - some private equity arrangements that look to be corporate controlled turn out, on technical grounds, not to be so controlled).

New CGT regime - implications for share schemes

Fri 19th October 2007

In the pre-Budget statement on October 9th 2007, the Chancellor announced that the previous capital gains tax regime would be abolished and replaced by a flat rate charge of 18 per cent.,to take effect from April 6th 2008. Here we consider some of the implications.

Are statutory share schemes such as EMI still worthwhile? Definitely. A capital gains tax rate is 18 per cent. is still much better than the total tax and NI of up to 53.8 per cent.on cash payments or unapproved schemes.

Can we change the vesting conditions on our EMI options so that employees can exercise before April 2008? Not normally. However after April 2008 the participants will still retain 82 per cent. of their gains.

Do these changes affect our company’s Share Incentive Plan? No tax is payable on shares held in a SIP trust, irrespective of how long they remain there. If shares are withdrawn within 5 years of appropriation, some income tax and NICs may be payable. Capital gains tax is payable only on taxable gains after shares have been withdrawn from trust, and this rate is now a flat 18 per cent.
What about share purchases made by employees? Gains subject to capital gains tax will be taxed at a flat rate of 18 per cent.

Does the new regime offer any opportunities? If you were previously unable to offer EMI options, perhaps because of size or business activities, you could consider offering options under another statutory scheme, the CSOP. The share value limit is £30,000 not £100,000 and the options cannot be exercised in less than three years. However the maximum tax rate, which used to be 40 per cent., will be 18 per cent.

Are there any ways employees can reduce a capital gains tax charge on share scheme gains after 5th April 2008? Methods include spreading gains over two or more tax years, in order to use multiple personal exemptions3; transferring shares acquired from a SIP or SAYE scheme into an ISA; making use of the unused personal allowances of a spouse or civil partner, or making pension contributions with some of the sale proceeds which will create a countervailing reduction of income tax.

Are your employees concerned about the new tax treatment for their share incentives? If so you can ask us to provide you with a document explaining the general implications for participants in your own company’s scheme(s). A small charge may be made. Please contact us on Freephone 0800 043 8150 to discuss further.

SAYE bonus rates increased

Sat 15th September 2007

The Treasury has raised the bonus rates on Save As You Earn (SAYE) share option schemes. This reflects a general rise in interest rates over the last year. About 1.7 million people participate in these schemes. More than 90 per cent. of the FTSE 100 companies offer these schemes as do many smaller listed and private companies.

SAYE schemes are set up over 3, 5 or 7 years. At the end of the chosen period of saving, the employees receive a tax free bonus. The RM2 Partnership has found that many employees value the savings aspect as much as the opportunity to purchase shares in their employer. Through regular saving employees can build up significant sums of money. However if the company’s shares have done well over this period, employees can also profit by exercising their options. Alternatively they can ask for a full cash refund.

Over a three year savings period, participants will now receive the equivalent of 2.4 monthly payments tax free. Over five years, the bonus is 7.2 months and over a 7 year contract, the participant will receive a tax free bonus equal to well over a year’s worth of contributions (13.3 months).

The RM2 Partnership designs, implements and administers SAYE share option schemes. Contact us for further details.

Share scheme returns go on-line

Fri 15th June 2007

We understand from HM REvenue & Customs that, within the next two years, they will require most employee share scheme returns to be filed electronically. The online filing facility for year-end share plan returns was first made available in April, for all the stautory share schemes except the Enterprise Management Incentive. RM2's systems are already capable of submitting the information in the required format. Many in-house administrators, however, lack the time or resources to implement the necessary systems and this will further increase the pressure for such work to be out-sourced to professional administrators.

HMRC have set up a help-line to deal with puzzled HR executives and company secretaries who may have difficulty with these new arrangements. THe issue of paper forms is already being phased out, and HMRC will in future merely issue notices that the forms must be submitted. The necessary forms can be downloaded from the HMRC website at http://www.hmrc.gov.uk/shareschemes/ann-app-schemes.htm

Share scheme returns go on-line

Fri 15th June 2007

We understand from HM REvenue & Customs that, within the next two years, they will require most employee share scheme returns to be filed electronically. The online filing facility for year-end share plan returns was first made available in April, for all the stautory share schemes except the Enterprise Management Incentive. RM2's systems are already capable of submitting the information in the required format. Many in-house administrators, however, lack the time or resources to implement the necessary systems and this will further increase the pressure for such work to be out-sourced to professional administrators.

HMRC have set up a help-line to deal with puzzled HR executives and company secretaries who may have difficulty with these new arrangements. THe issue of paper forms is already being phased out, and HMRC will in future merely issue notices that the forms must be submitted. The necessary forms can be downloaded from the HMRC website at http://www.hmrc.gov.uk/shareschemes/ann-app-schemes.htm