Employee share schemes for private companies and SMEs

The UK has long encouraged employee ownership through Employee Share Schemes (ESS). These flexible plans allow employers to grant employees a share in the ownership of the company for which they work.

There are many types of employee share schemes including HMRC-approved schemes and unapproved schemes. We often hear about how publicly-listed companies can benefit from employee ownership, but private companies especially small and medium-sized enterprises (SMEs) can also use these schemes effectively when it comes to talent attraction and retention. In this article, we’ll focus on employee share schemes for SMEs.

What is an employee share scheme?

An employee share scheme is a way for employees to gain a portion of company ownership as part of their remuneration package. It can be a useful tool to help employers recruit, retain and motivate employees. For employees, it can be an additional way to help them achieve their financial goals.

There are many forms of ESS available that are suitable for SMEs – here’s the breakdown of the common forms:

HMRC-approved share scheme:

• Enterprise Management Incentive (EMI)
• Company Share Option Plan (CSOP)

Unapproved share scheme

• Growth Shares
• Joint Share Ownership Plan (JSOP)
• Unapproved Share Option Plan
• Phantom shares

	EMI	CSOP	Growth Shares	JSOP	Unapproved Options	Phantom Shares
HMRC-approved?	Yes	Yes	No	No	No	No
Plan type	Share Option	Share Option	Shares	Shares	Share Option	Not Real Shares
Tax at grant	Nil	Nil	Nil – if they pay full market value for them	Nil – if they pay full market value for them	Nil	Nil
Tax at exercise	No tax at exercise if purchase price >= AMV at grant	No tax at exercise (at least 3 years from grant date)	N/A	N/A	Income tax and NICs generally charged	N/A
Tax at sale OR payout for phantom shares	CGT at sale – Taxed on any growth in value of their shares; Likely to qualify for BADR rate (10%)	CGT at sale- Taxed on any growth in value of their shares	CGT at sale – Taxed on any growth in value of their shares	CGT at sale- Taxed on any growth in value of their shares	CGT at sale – Taxed on any growth in value of their shares	Income tax and NICs generally charged at payout
Corporation tax relief	Yes	Yes	Little/No	Little/No	Little/No	Little/No
Discretionary?	Yes	Yes	Yes	Yes	Yes	Yes

How do HMRC-approved ESSs work?

1. Enterprise Management Incentive (EMI)

An EMI scheme is a type of share option plan that allows SMEs (fewer than 250 full-time employees) to grant employees the option to buy shares in their company at a future date at a certain price (i.e. the exercise price) after meeting certain conditions.

• Why attractive to SMEs? Share options focus on value appreciation and so can help to motivate employees to grow the company’s share value. Employers and employees also qualify for valuable tax relief if certain conditions are met.
• Participants: Can invite selected employees.
• Discount for purchasing shares: Discount possible, depending on scheme design.
• When to exercise: Depends on vesting.
• Offering limits: Employees can be offered up to £250,000 worth of options.

2. Company Share Option Plan (CSOP)

CSOPs are a type of share option plan that allows companies to grant employees the option to purchase company shares at the market value, without a  discount. Suitable for companies of all sizes.

• Why attractive to SMEs? Share options focus on value appreciation and so can help motivate employees to grow the company’s share value. This scheme has fewer restrictions than the EMI scheme. Employers and employees also qualify for tax relief if conditions are met.
• Participants: Can invite selected employees.
• Discount for purchasing shares: No discount under CSOPs.
• When to exercise: Typically held over 3 years before sale to enjoy more tax benefits.
• Offering limits: Employees can be offered up to £60,000 worth of share options.

How do unapproved ESS work?

1. Growth shares

Commonly used by private companies aiming for an exit, start-ups and private equity-backed companies with substantial growth prospects, growth shares give employees the opportunity to share in the growth in value of the company if the company value goes above a valuation threshold. Once issued, employees typically need to pay to acquire the growth shares on the date of award. They are a different class of shares from ordinary shares.

• Why attractive to SMEs? Growth shares focus on value appreciation above a pre-set threshold, which can be used by employers to motivate employees to grow the company value beyond the threshold.
• Participants: Can invite selected employees/non-employees.
• Discount for purchasing shares: Possible, depending on scheme design.
• When to sell: Depends on vesting, e.g. on the sale of the company or an initial public offering.
• Offering limits: N/A

2. Joint Share Ownership Plans (JSOP)

Under this plan, the employee and an employee benefit trust split the benefit of ownership of a shareholding between them. JSOP bear many similarities to growth shares but is still a choice for listed companies too.

• Why attractive to SMEs? JSOP focus on value appreciation above a pre-set threshold to motivate employees to grow the company value beyond the threshold.
• Participants: Can invite selected employees.
• Discount for purchasing shares: Possible, depending on scheme design.
• When to sell: Depends on vesting.
• Offering limits: N/A

3. Unapproved share option plan

Unapproved options, also called ‘non-tax-advantaged’ options, don’t provide the generous tax benefits that EMI options do, as they are not HMRC-approved. They can however provide more flexibility to businesses in terms of scheme design, as such they are generally considered to be suitable for companies of all shapes and sizes.

• Why attractive to SMEs? Options focus on value appreciation that motivates employees to grow the company’s share value. Unapproved share options have much fewer restrictions than an EMI scheme, suitable for those who can’t satisfy all EMI conditions.
• Participants: Can invite selected employees/non-employees.
• Discount for purchasing shares: Possible, depending on scheme design.
• When to sell: Depends on vesting.
• Offering limits: N/A

4. Phantom shares

Phantom shares give employees the financial benefits of stock ownership by following the value of the company’s actual stock, but without offering them the actual company share or requiring them to invest. Since employees don’t hold any actual shares, this share scheme type can help protect the employers and the company’s shareholders from the risk of share dilution. Suitable for companies of all shapes and sizes.

• Why attractive to SMEs? It makes it simpler for employees to participate in the growth of the company without the complexity that comes with issuing actual shares. Also, share dilution is not a concern under this plan.
• Participants: Can invite selected employees and non-employees.
• Discount for purchasing shares: Possible, depending on scheme design.
• When to sell: Depends on vesting.
• Offering limits: N/A

Benefits for private companies

Help improve cash-flow management
ESSs reduce the amount paid out in cash, which could be especially ideal for companies with limited cash flow, such as startups.

Attract and retain top talent
These schemes can help a company recruit, retain and incentivise employees by providing them with financial incentives above and beyond base salary and with the potential for more benefits than a cash-only bonus.

Create ownership among employees
Giving employees a real stake in the company can help make them think more like owners and therefore align their interests with overall company goals.

When the company succeeds they succeed. Some of the benefits of introducing an employee share scheme can include reduced turnover and absenteeism, more company pride and loyalty and a greater willingness to work harder and make more suggestions to improve overall performance.

Benefits for employees

Provide an opportunity to build wealth
Such schemes can help improve your employees’ financial well-being by providing financial incentives which they can then potentially use for long-term goals like retirement, or shorter-term goals, such as buying a car/home or paying for college. Employees close to retirement and working at a company with an employer ownership plan had more than 10 times the median savings of employees nationally (Source)

Enjoy tax benefits
Some schemes especially HMRC-approved schemes offer tax relief to participating employees, including:
– No tax at grant.
– No income tax and no NICs at exercise if conditions are met.
It’s important to note that share schemes do carry risks. If your company fails and the share value decreases, employees may not be able to sell their shares for a profit.

Employee share scheme administration

The administration process involves everything from tracking and reporting changes in share ownership to updating documents, policies, procedures and more, communicating with HMRC and other stakeholders, consulting with your board of directors and staying compliant.

There are many administrative tasks and advanced knowledge involved. Companies usually choose to 1/operate the plan themselves, 2/hire professionals to run it for them or 3/use a software program to manage their schemes.

The first option risks being the most impractical as SMEs often may not have all the required skillsets. Besides the time, focus and effort spent administrating the plan might be better spent on growing their businesses. The second and third options as a result often make more sense to many companies, who then choose to outsource the management of their scheme.

How we can help

At J.P. Morgan Workplace Solutions, we operate as an extension of your company to cover everything from implementation to granting, tracking, trading, compliance, tax and all other stages in between.

So if you think an employee share scheme might be a good fit for your company or would like to learn more, get in touch with us today. One of our team members will walk you through plan options and discuss how you could simplify your employee share scheme implementation and administration.

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