Using share option schemes to create more business value

Last updated: 8 January 2020

Equally, you need to fill the gaps in your team as your business grows to the next level. To incentivise early staff and attract talented new joiners, you should consider a share option scheme, which enables you to grant share options to your employees tax efficiently. The most popular scheme is the Enterprise Management Incentive (EMI) share scheme, because it’s the most tax efficient and easy to implement.

The key benefits of an EMI scheme:

1. It can create a clear financial alignment between you and your team, helping you to build value that both you and your staff will benefit from.
2. Set at the right price, the scheme can act as either a historic reward or a future performance incentive.
3. The EMI scheme is HMRC approved, meaning that: a) When you get it right, your employees will only pay 10% tax on the gain in value on their options when they sell them b) A valuation of the options can be agreed by HMRC, which removes uncertainty and later tax problems.
4. The scheme is easy to implement (with the right advice) and easy to tear up if an employee leaves. 

Yes, the benefits are appealing, but there can be severe consequences if mistakes are made! We cannot reiterate enough how important it is to implement the scheme correctly. Failure to adhere to the legislative requirements could leave your employees with an income tax bill of up to 45%, opposed to a capital gains tax bill of 10%.

Common errors made when implementing an EMI scheme:

1. Trying to understand the rules of the scheme by browsing the internet instead of seeking professional advice. We recommend engaging an experienced lawyer to ensure that you avoid any errors.
2. Failing to update the company’s articles to reflect the new scheme.
3. Missing out key facts from the valuation that HMRC has ’agreed’ to. For example, if there was a historic offer for the business, or an investment made into it, the valuation ‘agreed’ cannot be relied upon and causes unnecessary uncertainty.
4. Messy paperwork, including option agreements not completed properly or not appropriately executed within the required deadlines, which can lead to uncertainty with the valuation of the options. In a worst-case scenario, certain administrative errors can cause the tax-advantaged status of the scheme to be jeopardised. For example, failing to inform HMRC about the options you have given to employees within the required time frame.
5. Changing the terms of the option agreement without getting appropriate clearance from HMRC.

If any of the above are incorrect, the scheme may not qualify as tax-advantaged and that £100,000 incentive you had planned for your most trusted and diligent employees will not have a tax bill of £10,000 but instead could be a tax bill of up to £45,000! Your company could also be left with an additional £13,800 National Insurance bill. 

For many entrepreneurs, the planned total incentive for the team is often far greater than £100,000 and therefore if the scheme is not implemented correctly it can cause unnecessary tax liabilities, awkward conversations with your employees, additional monetary costs to make good to your employees, and it can (and does) derail transactions. However, the pros of implementing an EMI scheme far outweigh any cons for those business owners that seek advice and implement it correctly.