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The Built Environment - Incentivising your team
1 November 2021
The Construction Leadership Council recently released the Industry Skills Plan for the UK Construction Sector, which sets out to address the ever-growing skills gap in the sector. A key part of this was attracting and retaining the skills and talent the sector needs.
From a tax point of view, there are many ways to incentivise key members of your team. Cash bonuses are expensive to fund, tax-inefficient and are unlikely to provide long term incentivisation for key members of staff in promoting loyalty to the company or developing shareholder value. Given the experience of the recent pandemic, businesses have appreciated the need to remain cash flow positive so what are the alternatives, if any, to paying cash bonuses out?
Here’s a few options that are available as employee incentives, and often very popular to introduce within businesses.
Enterprise Management Incentives (EMI) scheme
An EMI scheme is an approved employee share scheme that is available to most trading companies or a holding company of a trading group. It allows employers to grant share options to key employees in a tax-efficient manner as a reward for their hard work within the business and/or to retain and incentivise key staff.
EMI schemes are approved by HMRC and provide some welcome tax incentives:
No CGT or income tax is charged on granting or exercising options provided and no discounts are provided to the initial market value.
CGT will be charged on the sale of shares with the possible benefit of business asset disposal relief and a 10% tax rate on profits.
Corporation tax relief for the employer on the exercise of the options.
As EMI schemes are approved by HMRC, various conditions must be met by the employer, employee and the options themselves. These conditions are not particularly difficult to meet or exhaustive but the tax advantages that can be obtained can be very beneficial to both parties involved.
Growth shares provide an opportunity for employees and directors to acquire genuine equity in their employing company in a way that enables them to share in the real growth in the value of the business that they help to generate.
A growth share delivers value to the employee shareholder if the value of the company increases above a set ‘hurdle’. Returns to employees from growth shares are usually subject to capital gains tax (CGT).
Unlike the EMI scheme, growth shares are not an approved share scheme with HMRC. However, similarly with EMI, generally the tax charged on the issue of such shares is kept to a minimum and CGT will be charged up to a rate of 20% on an eventual sale of shares.
Phantom shares or options
Phantom shares and options are rights to receive cash payments that relate to the value of real shares. For example, on a sale of a company to which the phantom shares relate to, the holder is entitled to receive a cash payment equivalent to an amount they would have received had they been participating in the sale and selling shares themselves.
The tax treatment of a phantom share is the same for a normal cash bonus and these are not tax-advantaged or approved by HMRC.
Internal market for shares
An issue to consider when creating a share plan is the lack of a market for the shares to be sold which in turn makes them less attractive to employees.
It is possible to address this issue by creating a market for the shares through a structure such as an employee benefit trust (EBT). Typically, an internal market would be combined with, for example, an EMI scheme.
As touched on above, an Internal market is primarily geared by the chosen share scheme. If used with EMI, this would mean that the EBT acts as the purchaser for any shares sold by staff. This option is not tax-advantaged or approved by HMRC, but the share scheme used with this could be, e.g. EMI.