Avoiding Costly Mistakes in Your Share Plan
If you’re running an employee share plan, especially if you’re setting up a scheme for the first time, there are some trip hazards that you may not be aware of. These may vary depending on the share plan you’re using. Check these points out to avoid making costly mistakes.
Check that your employees actually employees
You can only offer certain tax advantaged plans like Enterprise Management Incentive (EMI), Company Share Option Plan (CSOP) or Share Incentive Plan (SIP) to genuine employees. There may be tax consequences if you use these plans for non-employees. Even if you’re running a non-tax advantaged plan like a Growth Share Plan (GSP) or a Non-Tax Advantaged Option Plan (NTA), these are likely to be set up as an employees’ share scheme (as defined in company law). If you use those plans for consultants or non-executive directors you may be breaching company law and financial services legislation. It’s important to keep incentive plans for employees and consultants separate.
Check your articles and shareholders agreements
Your company’s articles of association and any shareholders’ agreements may be specific about whether you can set up a share plan. Sometimes they even limit what type of plan can be used. They may also limit how much equity you can award, and what authorities you might need. You should check that your constitutional documents align with the details of your share plan, and this may depend on what plan you’re using. For example, a SIP plan has very specific rules about good leavers and bad leavers, so you may need to amend your articles to take this into account.
Take care on plan limits and share values
The limits and rules vary according to the plan you’re setting up. For example, if you grant an EMI option with a value beyond the £250,000 limit, the excess will be treated as non-tax advantaged option. However, if you grant a CSOP option which exceeds the £60,000 limit, that option will not qualify as a CSOP at all. You should also take care if you’re granting CSOP options to individuals who already hold EMI options. In some circumstances this can lead to the disqualification of previously granted EMI options.
Be clear about how you will treat leavers
All employee share plans will have to deal with departing employees at some point. Some schemes – for example, EMI and non-tax advantaged arrangements like GSP – are extremely flexible; others, like SIP, are more rigid. The tax law relating to CSOP and good leavers is different again. Be clear at the beginning what the tax law says about your plan and how you’re going to work with it.
Understand your HMRC reporting obligations
You must tell HMRC if you make equity awards to any employees, but the reporting requirements can vary depending on the plan you’re using. EMI options must registered online within 92 days of date of grant, or they won’t qualify as EMI options (though this will change next year). You must notify HMRC about a CSOP, SIP and SAYE by 6 July following the end of the tax year in which you first grant options or award shares.
You’ll need to send in an annual return for every share plan that you operate, whether tax advantaged or not, again by 6 July. This applies even if nothing has happened to your share plan – HMRC still want to see a nil return.
If you don’t do this, you will be subject to fines, so be clear about the reporting requirements as they apply to your particular share plan. You should also make sure you’ve kept good records for all your share plan activity.
Not all share plans are created equal and some of the details can be easily missed or confused. If you think you’d benefit from expert guidance in setting up a new plan, or running your existing arrangements, get in touch with us on email@example.com and one of our advisers will be happy to arrange a call.