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Retain valuable-employees-slides

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Discover how to keep and motivate your most valuable assets, your employees, using Enterprise Management Incentive (EMI) options.

EMI options are versatile, tax efficient and incentivise employees to stay and develop your business.

You've spent long hours building your technology business. Now you want to inspire and retain the people who execute your strategies.

EMI options are effective, inexpensive, and appreciated by your team.

Published in: Business
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Retain valuable-employees-slides

  1. 1. Incentivising Employees LONDON TECHNOLOGY WEEK Speaker: Catherine Gannon Solicitor, Chartered Institute of Taxation (CTA)
  2. 2. Introduction 1. Alternatives to cash 2. Ideas on the design of share awards 3. Implementation
  3. 3. Overview • Option, phantom option or shares • Taxation • Dilution • Reporting obligations
  4. 4. Incentivisation
  5. 5. WHAT IS BEST? • Costs of implementation vs. tax savings • Employee involvement in business • Only incentivises if properly understood
  6. 6. Example: Unapproved options Year Event Tax 2013 Option granted over 1,000 Shares:  exercisable at £2 each No tax charge on grant 2015 Option exercised over 1,000 Shares:  now worth £20 each Combined income tax and NIC charge + Exercise price £2,000 payable 2015 1000 Shares sold: Income tax on “gain” 1000 x £20 per share Proceeds £20,000 Exercise price payable (£2,000) Gain £18,000 Combined rate of income tax and NIC of 54.59% (£9,826) 2015 Net proceeds retained £8,174
  7. 7. Example: Employee Shares Year Event Tax 2013 Employee receives 1000 shares worth £2 each No income tax or NI charge on grant 2015 1000 Shares sold at £20 No CGT on “gain” 1000 x £20 per share Proceeds £20,000 CGT payable NIL 2015 Net proceeds retained £20,000
  8. 8. Year Event Tax 2013 Option granted over 1,000 Shares:  exercisable at £2 each No tax charge on grant 2015 Option exercised over 1,000 Shares:  now worth £20 each No tax charge on exercise but exercise price of £2,000 payable 2015 1000 Shares sold: Tax on “gain” 1000 x £20 per share Proceeds £20,000 Exercise price payable (£2,000) Gain £18,000 Annual exemption £11,100 (based on 2015/16 allowance) Taxable gain (11,100) £6,900 CGT payable (£6,900@10%)* £690 2015 Net proceeds retained £17,310 Example: EMI
  9. 9. Year Event Tax £ 2013 Phantom created over 1,000 notional shares  Value £2 each NIL 2015 Phantom paid out over 1000 notional shares Income tax on “gain” 1000 x £20 per share Payment 20,000 Less notional exercise price (2,000) Gross payment to employee 18,000 Income tax @45% Employee’s NI 2% (8,100) (360) 2015 Net proceeds retained by employee Employer’s NI bill @13.8% £9,540 £2,484 Example: Phantom Option
  10. 10. Going to South of France
  11. 11. Year Event Tax £ 2015 Phantom paid out Income tax and NI on gain Employee left with Employer pays NI 9,540 2,484 Unapproved option exercise Income tax and NI on gain Employee left with Employer pays no NI if election made (Employee retains more if no NIC election but employer left with NI charge) 8,174 EMI option exercise CGT on gain Employee left with 17,310 Employee Shares sold No CGT on gain Employee left with 20,000 Going to South of France
  12. 12. Employee Owner shares • New status available from 1 September 2013 • Shares between £2,000 and £50,000 • Employees give up rights – flexible working, training, redundancy pay Since 2013 Employee Shares
  13. 13. Employee Owner shares • Shares free of CGT • NICs and Income Tax not chargeable on first £2,000 • Employee must not pay for shares • Advice from a relevant independent adviser Employee Shares
  14. 14. Employee Owner shares • Time delay • Must not have a material interest (25%) • Ex-employee buy-back Employee Shares
  15. 15. Qualifying Companies - Three key requirements: 1. 51% subsidiaries 2. Gross assets test £30M 3. Number of employees < 250 including part timers EMI options
  16. 16. Qualifying Employees - Two key requirements: 1. 25 hours per week or 75% of time 2. Must not own 30% or more of total share capital EMI: who can get options
  17. 17. Financial limit - Two key requirements: 1. Market value per employee £250,000 2. Total share value £3M Time limit – 10 years EMI: Financial limit
  18. 18. • Trading company • Officer or Employee • Lifetime Limit • 5% voting shares Entrepreneurs' Relief
  19. 19. EMI exceptions • Do not need to hold 5% minimum • 1 year shareholding requirement replaced with 1 year EMI option holding requirement • Do not need to exercise pre-exit EMI and Entrepreneur's relief
  20. 20. • EMI - corporation Tax deduction equal to gain even though no income tax payable by employees • Phantom options – charge to P&L as if salary • Unapproved options – match to income tax charge Corporation Tax
  21. 21. • If don’t qualify for EMI • Don’t benefit from relief from NI and Income Tax • Entrepreneur’s Relief additional benefits do not apply Unapproved Options
  22. 22. • Need Shareholder’s Agreement • Good Leaver/Bad Leaver provisions essential • Different classes of shares Shares – Not Options
  23. 23. • Right to receive cash • Can be conditional on still being employed • Capped or payable in shares Phantom Options
  24. 24. Implementation - ‘core’ details •Company/group •Employee(s) / non executives / consultants •Articles •Share capital •Constitution of the company and powers
  25. 25. Current Shareholders • What are the % of current holdings? • Informal promises? • Would a different class be beneficial?
  26. 26. Current Shareholder • What are the % of current holdings? • Informal promises? • Would a different class be beneficial?
  27. 27. Any questions? How can we help you? Visit www.gannons.co.uk for further information http://twitter.com/#!/gannons_law
  28. 28. This information is designed to provide a summary of the issues addressed. Therefore, it is not intended as a detailed commentary on the relevant law and any comments made should not be acted upon without first taking specific legal advice.

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