Options or shares for consultants or self-employed

Posted by RM2 at 09:41 on 10 Aug 2015


Companies may want to offer options or shares to consultants or self-employed persons. Whilst it is less frequent for companies to offer equity to self-employed persons, there are a number of issues that companies should consider before proceeding.

A key concern when considering self-employed individuals is the tax status of the individual. Granting options or share awards to a self-employed person should not in itself prejudice his or her self-employed status. The UK tax regime is not, however, very flexible when it comes to the issue of employed or self-employed status. In particular, HM Revenue & Customs (HMRC) is not bound to accept that an individual has self-employed status, despite the fact that the parties may have willingly engaged on such terms.

Businesses risks include potential PAYE and national insurance (NI), plus interest and penalties, for getting the issue of employment/self-employed status wrong if HMRC disagree. It might be appropriate for companies to review the tax status of self-employed persons as part of granting options or share awards.

Some individuals do not work directly for the end client (the company), but instead supply their services through an intermediary, such as a personal services company (‘PSC’). If so, and the IR35 rules apply, the end client should not be liable for PAYE and NI in respect of payments and non-cash items (including option and shares) if the payments and non-cash items are provided directly to the PSC. Companies would need to take professional advice in structuring the grant of options or share awards through a PSC to ensure that the end user client does not have potential exposure to PAYE and NI.

Other issues that companies will need to consider, are:

What happens if the self-employed person ceases to provide services? The contractual agreement granting options or share awards should state what happens if the individual ceases to provide services. For example, that the option will lapse or the shares will be offered for sale or bought back by the company.

Does the company have shareholder authorities to issue and allot shares? This might require the company to obtain shareholder authorities to issue and allot shares and to dis-apply any pre-emption rights. If there is a shareholders’ agreement in place, consents might be required to grant options or share awards too.

Ensuring that the grant of option or share award will not breach the Financial Services and Markets Act 2000 in respect of any regulated activity or financial promotion. There are various exemptions and the company should consider if any are relevant to the proposed arrangements.