Share schemes common pitfalls

By Tolley in association with Andrew Rainford
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The following Employment Tax guidance note by Tolley in association with Andrew Rainford provides comprehensive and up to date tax information covering:

  • Share schemes common pitfalls
  • Giving away too many shares
  • Setting option exercise prices too high
  • Not taxing internationally mobile employees
  • Neglecting to collect PAYE from employees
  • Section 222 charge
  • Failing to notify grant of an EMI option
  • Forgetting annual returns
  • Ignoring the section 431 ITEPA election
  • Making schemes too complicated
  • ‘B’ share schemes

It is worth remembering that the vast majority of employee share schemes run smoothly and do not suffer from any of the pitfalls referred to in this note.

However, for those that do not take enough care in setting up and operating plans, there is always the risk that there could be unforeseen consequences.

This list, whilst not exhaustive, covers some of the problems that scheme administrators and advisers may encounter. Recent changes to the administrative requirements regarding notification and annual reporting have added another layer of pitfalls for the unprepared.

Giving away too many shares

While public companies are generally constrained by regulations preventing them from putting too many shares or options into the hands of employees, no such limitations apply to private companies.

Sometimes, excessively generous businesses offer currently low worth shares to the employees that they most value at the time without looking at the long term consequences.

In a small, tightly run organisation, it may well seem appropriate to offer key managers a significant stake in the company in order to maintain their loyalty and level of performance.

However, it is not difficult to see that if, for example, a finance director, marketing director and an operating director are each offered 10% of the shares in the company, that automatically dilutes the owner’s shareholding to 70%.

This can have serious implications when it comes to voting power with an issue arising if subsequently the company expands and two other senior managers appear who are at least as deserving as the three that already have shares.

The prospect of giving away an extra 20% and reducing the principal’s holding to such an extent that they do not have a casting vote is almost certainly going to be unacceptable. This is an embarrassing situation that could well lead to internal friction and possibly the

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