RM2 > Resources > Useful Information > Non-Executive Directors (NEDs)

Non-Executive Directors (NEDs)

Non-Executive Directors (NEDs) are not normally regarded as employees for tax purposes, and therefore cannot benefit under any of the HMRC approved tax favoured employee share plans.  So what can be done for non-execs?

All too often, NEDs are awarded equity under an Unapproved Share Option Plan (USOP). Tasked with helping an executive board to navigate a safe course of passage for an entrepreneurial business, often for the whole journey from start-up, through fund-raising to commercial viability and ultimately to exit, it is not surprising that many non-execs are less than happy with the income tax charges associated with USOPs. Particularly when you consider that such inefficient incentive awards are probably not just in one company, but across the portfolio of businesses they mentor. So to all those NEDs out there holding or contemplating unapproved share options, we want you to know that there is a more tax efficient way to receive equity in the companies you advise.

We have encountered many situations over the years where unapproved options have been granted to NEDs and it is therefore unsurprising that their opinion of share schemes is often negative. However, cast off that jaundiced view and any green envy of the executive teams' tax favoured equity awards and explore whether a Deferred Share Purchase Plan (DSPP) is just what you have been looking for.

A word of warning to those NEDs operating via personal service companies, existing IR35 legislation is being extended to that (i) a worker who would be regarded for income tax purposes as the holder of an office or (ii) a worker who is an office-holder of the client company is brought within the IR35 rule. Finance Act 2013 contains the revision which means NEDs, previously considered to be outside of the scope of this legislation, will now be caught.

As a result, some NEDs and other interim advisors are increasingly being asked to work under PAYE employment contracts and this may present the opportunity to consider an approved employee scheme. However, this remains unlikely as a Company Share Option Plan (CSOP) requires directors to work full time, and an Enterprise Management Incentive (EMI) also possess working time qualification criteria which most NEDs are unlikely to satisfy.

For more information on the DSPP, please download our fact sheet, contact RM2 on 020 8949 5522 to discuss this plan in more detail.


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