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Most countries have one or possibly two tax efficient ways in which employees can acquire shares in their employer. The UK however has five different methods one of which actually creates a tax refund on participation.
These share schemes are government approved, government backed and their use is positively encouraged by HMRC. We have experience of advising on all of these from cradle to grave and will usually give a fixed fee price for our work in this area which we find our clients almost invariably prefer.
We implement all aspects of the following schemes together with less tax efficient varieties should relevant qualification criteria not be met:
We think it is key to understand the whole picture and whilst others sometimes forget the valuation piece we appreciate how crucial this can be and guide clients through this challenging and unusual process. We always concentrate on the corporation tax deduction which creates clear financial value on the exercise of a share option. We frequently see this kill the tax charge on the sale of a company and often see our selling shareholder clients receive a refund cheque!
The EMI scheme is the perfect way for technology SMEs to incentivise key staff using options to acquire shares. They are without a doubt the "best game in town" when it comes to tax efficient share options.
They are totally flexible and they work by the company giving certain employees the right to acquire shares in it. They are normally exit-only options so the employees only buy their shares a nano-second before the sale of the company. That way the employee never has to suffer the cashflow cost of buying the shares but they are automatically forced to sell, so cashing in their gain.
Share schemes are easy to implement and simple to administer. More importantly survey after survey shows how effective they are in motivating staff to work harder and more effectively for the company.
The great advantage of using the EMI scheme is the highly impressive tax advantage. If structured with a bit of planning the employee pays CGT at just 10% when he or she eventually sells, but the Company gets a corporation tax refund of 20%.
Looking at it another way, the taxman pays a further 10% on top of the sum which the employee receives.
No tax is payable on day one with all of it postponed to the exit date.
"John Dunlop of DAC Beachcroft LLP delivers efficient and practical advice and is regarded as having an excellent breadth of knowledge." Chambers and Partners UK, 2013 Edition, Employee Share Schemes, London
"I've seen up close just how efficient share options can be to motivate and keep staff. I don't think we would have been in a position to exit at the price we did without staff knowing they had some skin in the game. We all worked harder and we all shared in the benefits. If you want staff to feel engaged with the business and work harder for a sale, share options are the way to go. John knows this area backwards and nothing ruffles him. I have no hesitation in recommending share options and these lawyers." Finance Director of one of the Sunday Times Fast Track Companies
John Dunlop is the head of DAC Beachcroft's Corporate Tax Department