Build your own Share Scheme
Thinking of implementing your own share scheme? In this note we set out a summary of the matters to consider.
First, clarify your objectives. Questions to ask include:
- Is the scheme intended to reward a specific group of employees or will all employees be offered an opportunity to participate? Targeted schemes encourage individual performance while group scheme can help build a positive, collaborative team culture.
- What level of equity reward will achieve the desired effect? Too much, and shares are wasted. But too little, and the desired effects will not be obtained, also resulting in a waste of shares.
- Are recipients to be offered options or real shares? If the latter, will they purchase them and bear the investment risk or will they be gifted? If the latter, how will income tax and NICs be avoided on the whole value?
- What conditions should apply for example, loyalty, performance, or company value. How will these operate?
Choosing the right scheme
Next, choose your scheme. If you want to avoid employees paying income tax and NICs on all the benefits thus substantially reducing their value you'll need to do a thorough technical analysis of the available government schemes. You'll also need to look at the non-government schemes which also offer tax advantages. It will be necessary to assess which schemes are suitable and/or available, based on company activities, share capital, size, structure, number of employees and various other factors. HMRC has a number of share scheme manuals on their site including this one on the approved and tax advantaged schemes.
Now take a look at your existing Articles of Association and any shareholder or investor agreements. If you are a private company, there is a good chance that these documents will need to be modified before your scheme is implemented, otherwise serious trouble could ensue. For example, you will probably have to restructure your share capital so that it works practically with your scheme. If employees are to become shareholders at any point, there will need to be rules about how they can sell their shares, and to whom. There also need to be rules to ensure that no employee shareholder can impede a sale of the company.
In private companies, it is normally necessary to agree a share valuation with HM Revenue & Customs for tax purposes. Relevant factors here will be the sustainable earnings of the business, based on your historical performance and financial forecasts; the dividend policy of the firm, if any; and the value of the assets. Recent share transactions will also be relevant as will any approaches that have been made by prospective buyers.
In designing your scheme there are a few other things to consider, such as the relationship with the contracts of employment, the treatment of employer NICs and even the Data Protection Act. If you have performance and/or loyalty conditions these will have to be carefully drafted to avoid the possibility of disputes later. There can be considerable advantages to existing shareholders, the participants and the company itself when share schemes are run in conjunction with employee benefit trusts. Depending on the nature of your scheme you may have to get it approved by HMRC, or at least registered with them. You must supply detailed information to HMRC on your scheme annually on the prescribed forms. If you have made changes to your Articles of Association or share capital you will need to notify Companies House.
Finally, you'll need to make sure that the scheme is properly explained to the employees, since if they don't understand it, they may not value it. And the scheme administration going forward must be accurate and comprehensive, otherwise any tax advantages may be lost and HMRC may also seek to collect interest and penalties. This is a particular problem in share schemes when payments of PAYE are inadvertently missed.
Ready to begin? In choosing your scheme, you will clearly need to talk to someone with detailed knowledge of how different types of scheme design work in practice. You'll also need the services of a solicitor with knowledge of employee share scheme legislation, a valuation expert, and a share scheme administrator. If you are using a trust, you'll need to find a reputable firm of trustees with the specialist knowledge required.
Or why not just talk to us? We have been offering all the above services for nearly 15 years and have implemented many hundreds of employee share scheme. We are regularly approached by companies whose employee share schemes have been incorrectly designed, implemented or administered and the results can be devastating. More details of some of these horror stories can be found here.
If you would like to have an exploratory conversation about employee share schemes, please call us on 020 8949 5522 and speak to one of our advisors.