Getting your share plan right. Step 3. Valuation
If you’re just starting to think about putting in place a share scheme for employees, such as an Enterprise Management Incentive (EMI), a good starting point is our checklist . We’ve published some more detailed blogs on Step 1 (design questions) and Step 2 (how much to give away). Here’s Step 3 – how to deal with the share valuation.
Why is it important
If employees are acquiring shares in their employing company or group, it’s really important that you have a clear idea of what the shares are worth at the outset. The main reason for this is that, if an employee gets shares that are worth, say, £100 but only pays £10 for them, HM Revenue & Customs (HMRC) will see the discount, effectively, as a form of earnings and income tax may be charged.
In addition, if employees sell their shares in the future, capital gains tax (CGT) will be due on the increase in the shares’ value. If you don’t know the value of the shares when they were first acquired, it’s going to be very difficult to work out what the CGT will be – and that might mean the employee loses certain tax advantages, including the annual CGT exemption (currently worth £11,700 each year).
HMRC valuation services for tax advantaged share plans
Luckily, if you’re operating a tax advantaged share plan such as an Enterprise Management Incentive Plan (EMI), a Share Incentive Plan (SIP) or a Company Share Option Plan (CSOP) you can usually get HMRC to agree a valuation in your company’s shares. This provides an element of certainty as to tax charges for all parties. It also means that you don’t inadvertently exceed any of the limits attached to those plans when you make awards – for example, you can only grant Enterprise Management Incentive options to any one individual over shares with a value of up to £250,000 – if you exceed that limit, those options won’t carry the EMI tax benefits.
What to do
You can contact HMRC’s Shares and Assets Valuation office – these days, they even use email! - firstname.lastname@example.org . You’ll usually need to provide the following to support your application.
· Last 3 years’ full accounts
· A copy of your company’s articles of association and/or shareholders’ agreement
· Information about any recent share transactions and the prices paid for shares
· Background information about the company that may be relevant
· A summary of your proposals under the share plan
· Your proposed share valuation and the reasoning behind the methodology
HMRC typically take 3 weeks to turn around a valuation, so you need to take this into account when planning your timetable.
What valuation methodologies should I use?
This will depend on your company. HMRC will commonly accept private company valuations based on a straightforward price/earnings multiple applied to post-tax earnings. However, this approach may not always be appropriate – for example, a start-up company may not have any trading history, or a company paying significant dividends may need to value on the basis of dividend yields. In particular, if you’ve recently taken in investment, or had a separate valuation undertaken for any reason, you will need to take that into account and let HMRC know about it.
Remember, HMRC’s valuations can only be relied upon if you provide them with all the relevant information. If you don’t disclose everything at the time you write to them – or if there is a change in the company’s circumstances between the date the valuation is agreed and the date you award the shares, you should notify HMRC of this.
RM2 regularly agree valuations with HMRC for private companies for the purposes of employee share schemes. We’re also happy to work alongside your accountants or other advisers if that’s preferred. Contact one of our advisers on 0208 949 5522 or by email email@example.com if you would like more information.