Don’t let your share scheme become a chamber of horrors
Share schemes offer companies and their employees many benefits. In turn, as legal agreements, they need to be accurate to remain compliant. We take a look at some common mistakes companies make with their employee share schemes...
Common mistakes made
Implementing a scheme for which the company does not qualify. For example, we have seen Enterprise Management Incentive (EMI) schemes implemented when in fact either the company or the participants did not qualify under the legislation. Unfortunately, simply calling a scheme an Enterprise Management Incentive does not make it one. The result is that the scheme then operates as an unapproved scheme, placing participants in the income tax rather than capital gains tax regime.
Failing to amend or add appropriate transfer provisions to the articles of association. This oversight effectively means that companies are allowing employees to become shareholders but have no mechanism for clawing the shares back if the employee departs. This epic oversight can result in individuals leaving the Company they have shares in (sometimes with high levels of equity), including continuing to receive dividends, and perhaps becoming uncontactable. This obviously can lead to substantial problems come sale time.
Administration mistakes are also numerous and can prove to be costly particularly to the participant if the scheme does not qualify for capital gains tax treatment but instead falls into income tax. For example, a grant of EMI options needs to be registered with 92 days of the grant to be a valid EMI option.
Not checking regularly to see if your tax advantaged plan falls within the current legislation. It's no longer possible to rely on pre-approval from HMRC – instead, the Company must self-certify its plans from the outset. It's also necessary to keep an eye on any ongoing changes to share capital structure and ownership – corporate events can often result in options either becoming disqualified, or an inadvertent exercise trigger.
When looking for professional advice relating to share schemes you need to be sure that your advisors are looking at the bigger picture. How will a share scheme affect the Company? Why are you implementing the scheme? What outcome are you looking for? Professional advice and help on the various aspects of design, implementation and administration is crucial.
If you have an existing share scheme that was not put in place by us and don't wish to fall foul of the above pitfalls, or you are looking to implement a new scheme, why not give us a call on 0208 949 5522.