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3 Audit Areas

3 important ways to retain your best people

Share options

Growth options

EMI Share Options

In fact, there are many other ways to incentivise your key employees so they will stay with you longer and be more productive. You can give them shares in your company and, indeed, giving equity away does make sense in certain instances. (If you are planning to play a less active role in the business yourself, you’ll need one or more of the team to take over.)

There are profit-sharing schemes and annual bonuses, all of which we can help you establish. Perhaps these are the simplest ways of rewarding and tying in key members of your team to your company.

No costs, no obligations, no nonsense

How do share options work?

Share options are when you give someone who works for you a certain number of shares in the business. They are priced at today’s valuation though the employee doesn’t have to pay for them just yet.

What you hope is that the share price increases as the business prospers because when the vesting period is up, your employee can buy their shares at the original lower price, and sell them at a profit.

So, Daniel B is a software engineer at tech start-up ABC. Jennifer, the founder of the company, gives Daniel 10,000 shares, which are valued at £5 each. Daniel is allowed to vest 25% of his shares after one year, 50% after two years, 75% after three years and the full 1,000 after four years.

After one year, the shares are valued at £7.50 so Daniel can now sell 2,500 shares making a profit of £6,250. After two years, the company is doing spectacularly well and Daniel can now sell another 2,500 shares (or 5,000 if he has been patient). The share price is fixed at £12.00 so Daniel is making a profit of £7 per share. He could cash in for £35,000.

While Daniel was not taxed when he was granted the 1,000 shares, he is now going to have to pay income tax and an NI contribution which could add up to a tax rate as high as 53.4%. It’s possible he nets just £16,310.

How are EMI options different?

An Enterprise Management Incentive, to give it its full name, is a scheme designed for small businesses. EMI options cannot be awarded in a business worth over £30 million or with more than 250 employees. From a tax perspective, they are considerably more generous than ordinary share options. They are taxed under CGT (Capital Gains Tax) which is lower than income tax and they qualify for Business Asset Disposal Relief (if the employee is still with the company at the time of sale).

If Jennifer had set up an EMI scheme, Daniel would have had to wait until the company was sold. The reward for his patience is that he would pay a lot less tax.

For the employer, the attraction is a Corporation Tax deduction for the profit made by the employee. However, there are restrictions. And the value of the shares and options has to be agreed with HMRC before you start distributing them.

If you want to know more about the pros and cons of EMI options, give us a call.

No costs, no obligations, no nonsense

What are growth shares?

Let’s say your business has been performing well. You bring in a sales director to help you grow even faster. This is not someone who has been with you from the beginning. On the other hand, you want to encourage them to know that if they make a difference it will be rewarded.

You can award the newcomer with shares which are valued at a ‘hurdle’ price. You can also pay them dividends, which you can’t do with options.

For example, Daniel joins WowTech as their IT Director. He is given 5% of the growth shares issued. The company is worth £10 million and a ‘hurdle’ valuation is set at £12 million. If the company grows to £30 million, then he will share in 5% of the £18 million increase.

Growth shares are good for businesses that are already doing well. They encourage employees to give 100% by getting them to think like co-owners of the business. And they aren’t subject to Income Tax.

No costs, no obligations, no nonsense

Health warning

Each of the reward schemes we’ve described has its advantages and disadvantages. We can explain them clearly. More importantly, we can help you avoid some of the mistakes people often make, albeit with the best intentions.

You really don’t want any shareholder disputes as and when you come to sell the company. The more thought you put in at the beginning, the easier it will be at the end.

No costs, no obligations, no nonsense

Other services include:

Business valuations

If you are about to issue shares or share options, they need to be based on the existing value of the business. This is something we are expert at doing.

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However, there are multiple other occasions when you may want to have a valuation. When selling the business, for instance. You want to achieve as good a price as possible but no-one will take an unrealistic valuation seriously.

Similarly, when you pass the business on to family or to loyal employees, we can help everyone involved make the transfer of assets as tax efficient as possible.

Shareholder disputes

One of the most frequent disputes we deal with is when someone wants to leave a business.

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If they want to sell their shares back to the owner(s), they often believe the price they are offered is unreasonably low. They come to us for a fair and true evaluation of the business.

Our role in these conflicts is to try to save all parties the expense of litigation. In one recent case, by allowing us to mediate, two warring company directors saved themselves at least £250,000 in legal fees.

Personal taxation

If you want to sell the business or hand it over to a son or a daughter, what is the least expensive way of doing this?
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How can you avoid your family paying exorbitant sums in inheritance tax? Are there legitimate ways to reduce your tax liabilities? We have answers to all these questions and any others you may want to ask.

No matter what stage of life you are at, just starting out or beginning to wind down, our dedicated team of tax accountants can help you take advantage of the many reliefs and exemptions that exist.

No costs, no obligations, no nonsense