The document discusses various methods of employee incentivization, including options, phantom options, and shares, while highlighting their taxation implications and implementation considerations. It provides examples of how these options work in practice, detailing tax outcomes for unapproved options, employee shares, and EMI options. Additionally, it outlines the criteria for qualifying companies and employees under different schemes, emphasizing the importance of understanding these mechanisms for effective incentivization.

1. Incentivising Employees
LONDON TECHNOLOGY WEEK
Speaker: Catherine Gannon
Solicitor, Chartered Institute of Taxation
(CTA)

2. Introduction
1. Alternatives to cash
2. Ideas on the design of share awards
3. Implementation

3. Overview
• Option, phantom option or shares
• Taxation
• Dilution
• Reporting obligations

4. Incentivisation

5. WHAT IS BEST?
• Costs of implementation vs. tax savings
• Employee involvement in business
• Only incentivises if properly understood

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. 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. 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. 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. Going to South of France

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. 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. 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. Employee Owner shares
• Time delay
• Must not have a material interest (25%)
• Ex-employee buy-back
Employee Shares

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. 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. 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. • Trading company
• Officer or Employee
• Lifetime Limit
• 5% voting shares
Entrepreneurs' Relief

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. • 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. • 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. • Need Shareholder’s Agreement
• Good Leaver/Bad Leaver provisions
essential
• Different classes of shares
Shares – Not Options

23. • Right to receive cash
• Can be conditional on still being
employed
• Capped or payable in shares
Phantom Options

24. Implementation - ‘core’
details
•Company/group
•Employee(s) / non executives /
consultants
•Articles
•Share capital
•Constitution of the company and
powers

25. Current Shareholders
• What are the % of current
holdings?
• Informal promises?
• Would a different class be
beneficial?

26. Current Shareholder
• What are the % of current
holdings?
• Informal promises?
• Would a different class be
beneficial?

27. Any questions?
How can we help you?
Visit www.gannons.co.uk for further information
http://twitter.com/#!/gannons_law

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.