Recruitment and retention of staff is always an issue for businesses, and this is increasingly the case in a labour market with relatively low unemployment and where Brexit may cause further restrictions in the availability of staff. Indeed, the marginally higher tax cost to potential candidates of living in Scotland may also make it more difficult to recruit.
When you are looking for, say a new manager in your business, it can be difficult to identify quality candidates or to persuade them to move to your company.
Obviously paying a higher salary can be persuasive in these circumstances, but this has immediate financial implications in terms of the payroll cost (and also perhaps an increased fee payable to the recruitment consultant). Other soft benefits such as pension and health insurance can be considered, but again these have an immediate cost which will be suffered even if the new recruit proves to not be as high a performer as you had hoped for, or moves elsewhere for a higher salary in due course.
Share options are a way to help with recruitment and retention of key individuals, with the upfront cost being limited to professional fees. The most tax advantageous kind of share options are Enterprise Management Incentives (EMI). An EMI option scheme would enable you to offer a share in the business to potential recruits (or existing staff) such that they are keen to come and work with you (and stay with you for the long term) to grow the value of the company.
Options would generally be capable of exercise only on a future sale of the company. A value is agreed for the option, which will be at a discount to the value of the company. Imagine the company is worth £1m. Options could be given over 5% at a price of say £10,000. This value is agreed with HMRC in advance. If the company is then sold for £2m in future, the employee exercises their options, and then sells their shares. They would receive £100,000 (being 5% of £2m), less the £10,000 option price. They would pay tax at 10% on their gain. The current shareholder would receive £1.9m, which is £900,000 more than his or her shares were worth before taking on the new manager.
There is no tax to pay on the issue of the options, only on exercise, and so no need for the company to fund anything other than the professional fee cost.
Options can include performance conditions such that they can only be exercised if the employee hits certain performance targets. This would help to ensure that the growth in value in our example above is due (at least in part) to the performance of the manager rather than it being his or her good fortune to be employed at the time. They can also be structured such that the employee does not share in the historic value of the company.
If you would like to offer options to new recruits or to help retain and motivate existing staff, please speak to your Campbell Dallas contact who will refer you to a member of our Tax Consultancy Group team. The team have significant experience of agreeing valuations with HMRC and tailoring option schemes to suit the requirements of our clients.
0141 886 6644
The information in this blog should not be regarded as financial advice. This is based on our understanding in January 2018. Laws and tax rules may change in the future.