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Business Tax  •  Share Schemes

Creating a tax efficient John Lewis style business

By RJP LLP on 30 January, 2012

Last week, the deputy Prime Minister Nick Clegg made some interesting comments concerning employee share schemes. This is something RJP has always supported because of their many tax benefits. Nick Clegg suggested more firms should operate what he described as the ‘John Lewis model’, whereby employees have a stake in the business and a direct share in profits.

Strictly speaking, the analogy with John Lewis is incorrect because they operate a trust share scheme which is taxed accordingly, but the basic idea is a sound one; he is right in suggesting that share schemes are an under used tool which can be used to great effect to better motivate and reward employees.

Given the current economic climate, firms unable to offer salary increases might welcome share options as an alternative. Unfortunately all assets (including the value of your company’s shares) lose value during a recession.  Although the shares you might be able to offer options over to employees are perhaps worth less now, when the economy is performing better and they wish to exercise their share options, staff could see a far greater ultimate uplift, enjoying financial gains on a very tax efficient basis.

Obviously this is only relevant for companies that offer shares through a tax advantaged share scheme such as the Enterprise Management Incentive (EMI) scheme.  For such schemes, the value of the options granted must be approved by HMRC, and when those options are exercised the individuals will have no tax liability. When the shares acquired are sold, capital gains tax will apply (at either 18% or 28%), which compares very favourably with a bonus taxable at either 40% or 50%.  Indeed in some circumstances, the sale of the shares may attract entrepreneurs’ relief and attract capital gains tax of only 10%.

To establish a recognised scheme such as an EMI, a company must meet the necessary qualifying criteria which are set out by HMRC as follows:

-       EMI is aimed at companies with gross assets of no more than £30 million;

-       Certain companies are excluded from EMI, for instance property rental firms;

-       The company must be independent and must not be a subsidiary of, or controlled by another company;

-       The company must be permanently established in the UK;

-       Shares must be ordinary shares but they do not have to have voting rights.

In recent years RJP has advised on and implemented many share option schemes for clients across many industry sectors. They have always represented a very powerful and tax efficient motivator, and this becomes more so in today’s climate when high salaries are hard to justify.

For more information on tax efficient share option schemes, please contact Lesley Stalker by emailing las@rjp.co.uk.

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