Employee Share Schemes without Revenue Approval
If flexibility in rewards rather than tax efficiency is most important to you, there are any number of unapproved share scheme arrangements which you may wish to consider. These may be simple (e.g. an offer of shares to an executive at the current commercial value) or sophisticated (e.g. a share option scheme with profit targets). The one thing that they have in common is that the taxation treatment for participants can be disadvantageous.
An unapproved share scheme will normally fall into one of five categories:
Unapproved Share Option Scheme: The scheme is similar to the EMI or CSOP scheme but there are no limits on the amount or value of options given. In very limited circumstances where the shares aren't readily saleable, no NICs are due.
Such a scheme may be used, for instance, where executives do not qualify for an approved scheme because they hold too great an equity stake in the company or because they are self-employed directors. Such schemes can also be used in certain circumstance to top-up share options if a directors' maximum allocation of shares under an approved scheme has already been reached.
Long Term Incentive Plans: This is a generic name for a plan that aims to provide incentives to employees over the long term, usually a year or more, via rewards linked to shares or securities. It could involve the award of shares, the grant of share options or it could be a cash bonus scheme that tracks movements in securities. The shares are subject to income tax and NICs when employees receive them, even though they may then be held in trust for a period of time. If employees risk losing shares if certain conditions are not met, then income tax and NICs may be deferred until these conditions are removed or met. Alternatively shares may be awarded to employees if they meet certain performance criteria. Income tax and NICs arise on the value of the shares when they are actually acquired by the employee. The tax considerations for each option must be carefully considered and require specialist advice.
Phantom Share Scheme: This is, in fact, not a share scheme at all but a form of cash bonus scheme. Shares are notionally allocated to employees who, after set periods, (e.g. three or five years) may be paid the difference between the share price at the date of allocation and the share price at the date of the payment if the shares of the company have increased in price. The bonus is subject to income tax and NICs. No shares are transferred or issued. The business receives corporation tax relief on payments made under the plan. As a pure incentive arrangement this is cumbersome but where, for instance, the company has run out of shares to allocate this may be a useful substitute.
Restricted shares: These shares are subject to restrictions on what an employee can do with them for a certain time or that relate to certain performance targets. Income tax and NICs can be deferred on the part of the shares' value that is subject to the restrictions, but only until the restrictions are changed or removed. Any corporation tax relief due in respect of restricted shares is also deferred. However, employees and employers can choose not to defer income tax and NICs and instead to calculate them when the shares are acquired as if the restrictions didn't affect the value.
Convertible shares and securities: Businesses may decide to reward employees with shares or other securities such as bonds, stocks, contracts and futures that will convert into different shares or securities at a later date.
If the shares or other securities have an intrinsic value, the employee will be charged on that value via income tax and NICs, and they will also be charged on any gain when it converts into a more valuable share or security.
Employers may ask employees receiving earnings in this form to bear the cost of some or all of the employer's NICs on those earnings. Employees benefit from a reduction in their taxable income equal to the amount of any employer's NICs they pay.