How can you incentivise your staff following the coronavirus crisis?

Knill James Senior Tax Manager, Jamie Bird, considers two of the less common options to help businesses retain and reward key employees

Fundamental to future growth

As the economy starts to recover from the pandemic, it's a good time to consider how to retain and incentivise your employees, as they will be intrinsic to your business's growth and recovery going forward. It's also important to show appreciation for their loyalty and commitment during the coronavirus crisis.

Different options to reward staff

With cashflows likely to be tight, you may well want to incentivise and reward your key people in less traditional ways, such as share awards or share option schemes. Both of these benefits can be very attractive to both employer and employee alike. They also align your staff's interests with those of the shareholders, encouraging them to think like business owners.

Consider the pros and cons

Before choosing one of these alternative benefits, you should be aware of various factors that need to be considered.

Option 1: share awards

First it's important to be aware that any gift of value to an employee, including the deemed value of shares, will be taxed as employment income. This means that the recipient will have to pay any relevant Income Tax and also possibly National Insurance.

Why now is a good time

Post Covid-19, the outlook for many businesses may well be less steady than 18 months ago.  This makes it an ideal time to bring employees on board as stakeholders by issuing shares while the value of the business could be argued to be lower. It therefore follows that the employee will pay less tax on the shares they receive.

The business will also benefit because making key employees shareholders ties them into the long term future of the business, as they will now have a vested interest in the business succeeding.

What to consider before making share awards

The following points should all be considered before you decide to make any awards:

• Putting together a robust valuation of the business in readiness for any HMRC challenge
• Deciding what rights will attach to the shares
• Ascertaining if there is an NIC charge
• Finding out if the value needs to be reported via the payroll or via a tax return
• Putting a robust shareholders' agreement in place to protect the business from 'bad leavers'
• Reporting to HMRC

Option 2: Share option schemes, specifically an Enterprise Management Incentive (EMI) share scheme

An alternative to giving employees immediate equity is to put an EMI share option scheme in place. This works by giving the employee the option to buy shares at a specific price and at a specific point in the future.

No Income Tax charges

With many business values lower at the moment, a business could get the value agreed by HMRC when setting up an EMI scheme and once the terms of the option are met, the employee could acquire their shares with no Income Tax charges, assuming various conditions are fulfilled.

Great flexibility for employers

EMI schemes are very flexible and almost any set of conditions can be put in place for the options to be exercised. This means a scheme can be tailored to meet your business's specific objectives. Quite often the options only exercise on the sale of a business, but a possible condition for an employee could be: 'Your options can be exercised once the business returns to its pre Covid-19 state.'  In other words, if you work hard with us to help us get back to where we were, you will then be brought on board as a shareholder.

Benefits for employees

The benefit for the employee is that they will now have a vested interest in helping the business recover. Moreover, as this is an HMRC backed scheme, any tax charges will be to Capital Gains Tax on an eventual disposal, subject to options being granted at market value.

What to consider before setting up a share scheme

The following actions will all need to be taken before setting up a share scheme:

• Check that the business and the employees meet the conditions for an EMI scheme
• Agree what conditions should be put in place for an exercise of the option
• Decide which shares the options are over, and what rights these shares will have
• Get a valuation agreed with HMRC (this is required to complete the EMI registration)
• Get a solicitor to put together the legal paperwork (the actual options)
• Make sure the EMI scheme is notified to HMRC in time. There is a strict 92 day time window to let HMRC know about the scheme or you risk losing the tax benefits

Next steps

As you can see, both these options have considerable benefits, but there are a number of issues to take into account before choosing either route, as well as other possibilities which could be considered. If you would like any further advice or assistance in setting up employee incentive schemes, please get in touch with Jamie Bird via email -  JamesB@KnillJames.co.uk - or call him on 01273 480480.