When the share price is low, there is no better time to revamp, or set up a share remuneration scheme.

Furthermore, National Insurance bills will increase by ½ per cent for employers and higher paid employees from April 2011. Share incentives are one of the few remaining benefits which can escape NI.

The following ideas may provide talking points for you and your employees.

Options under an existing scheme are underwater

Options are underwater where the exercise price is higher than the current market value of the shares. This is increasingly commonplace for companies with option schemes that predate the slump in share values and can be very demoralising for employees, especially if share price is influenced more by the actions of others than the viability of their company’s products.

The exercise price under most schemes could be reset without adverse tax consequences and in the case of underwater options this can help to remotivate employees.

Is the share option scheme or phantom scheme serving the purpose for which it was intended?

Share schemes are introduced for a number of reasons typically
i) to help recruit;
ii) to help retain and stabilise a core team;
iii) because it is a tax efficient was of enhancing the remuneration package.

In times of economic slow-down this can contribute to a drag effect, if employees who might have moved on or retire serve time so they can exercise their options. It may be worthwhile considering in this situation that you bring forward the exercise date.

A share scheme will not necessarily reflect an employee’s performance and hence serve as a motivator if their contribution will only have an indirect effect on the value of the shares they own or over which they have options. It is possible to design a scheme where performance objectives are rewarded with shares rather than an increase in share value being the reward in itself.

Is the approved share option scheme looking like the poor relation in comparison with the EMI scheme?

The Enterprise Management Incentive Option scheme has one main advantage over the old schedule 9 approved share option scheme, in that there are no constraints on when the employee can exercise the options and how frequently.

Under the terms of a schedule 9 scheme, an employee cannot exercise options at all for the first three years and after that he can only exercise once every three years.

Has the company used up its enterprise management incentive option allowance for a given employee?

Companies can now issue EMI options over shares worth up to a total value of £3 million (value of the shares being measured at the time of grant of the option). However, no employee can hold options worth more than £120,000 at the time of grant.

In order to further incentivise employees already holding the maximum allowance other share acquisition arrangements may be the answer.

Restricted Share Purchase arrangements seek to turn the option contract on its head so that the employee acquires the shares at the outset but subject to forfeiture if he leaves the company before he has served the necessary period of time or until a company sale. By acquiring the shares themselves the Capital Gains Tax acquisition period begins to run from the outset giving advantages for Entrepreneurs’ Relief. Changes to the Articles of Association to depress the purchase price for the time being can help the employee fund the share acquisition price.

Bonuses are about to become payable under a phantom scheme resulting in a huge employers’ National Insurance bill. How can you avoid this?

The main disadvantage of a phantom scheme, in comparison with an option scheme, is the employer’s National Insurance bill. By accelerating the payment date so the bonus is paid before April 2011 the NI liability will be reduced by 1 per cent i.e. ½ per cent for the employer and ½ per cent for the employee (assuming his earnings are over the NI cap of £43,875).

Often an employee benefit trust may run alongside the phantom scheme offshore. The trust will hold the
shares notionally allocated under the phantom scheme, which it can sell in due course to fund the bonuses. Trustees of an offshore trust will not be subject to a Capital Gains Tax. This will not avoid the National Insurance but at least helps to fund most of the bonus and often most of the liability. If there is no such trust and the company is still some way off a sale which will trigger the payment of the phantom scheme bonuses, it may be advantageous to put such a trust in place.

Indeed if a sale is in sight, one of the reasons why a phantom scheme was previously used (to avoid a proliferation of share ownership) may no longer be an issue. It may be possible to award shares or options in exchange for employees giving up their rights under the phantom scheme. This could significantly reduce or eliminate the potential National Insurance cost.

Summary

Whether or not it is the right time to introduce a new scheme, there are many reasons to review existing share remuneration plans now. It is essential to keep up-to-date with the most effective planning opportunities.

Friend LLP’s tax team specialises in advising entrepreneurial and privately-owned businesses. For advice on share remuneration schemes or any other aspect of tax planning, please contact Frank Upton or Iain Wright