How to Attract and Retain Employees

With the disruptions caused by COVID and the current labour shortages in many industries, it is more important than ever to try attract and retain employees.  If your company has the cash to make pay rises, that is one short-term solution.  But for many businesses who are not currently cash rich or who are looking at attracting quality employees and employee retention in the long term, share schemes can be a cost effective solution for your company and an attractive prospect for employees.

When a company is considering share-based incentives for employees, it is key to take appropriate advice and determine an effective plan.  Such plan must consider both the commercial design and the tax treatment of the structure. 

Purpose of the incentive plan?
·         Recruit and retain staff
·         Incentivise staff
·         Enforce good/positive behaviours
·         Reward performance
·         Support the culture of the company
·         Enforce the structure of the company and employee based ownership
·         Performance based or only exercisable upon an exit event
Once a company has considered the above and determined the main purpose(s) of the plan, then advisors can look at tax structures which best suit what a company is looking to achieve.

Different types of plans
1.    EMI Schemes
These are one of the most popular share-based incentive plans and are often the best approach.  They are very flexible and very tax efficient.  However, they are not available to all companies, due to the qualifying criteria, which we look at briefly later in this blog.  These are a HMRC plan.
 
2.    CSOP, SAYE and SIP
These are alternative HMRC plans.  They are less flexible than EMI but still provide capital gains opportunities and income tax reliefs.
 
3.    “Geared Growth” Arrangements
These refer to growth shares and similar arrangements introduced more recently by HMRC.  They allow for income tax to be chargeable at the outset (if elections are made), then capital gains tax if performance is high (so valuation is key).  These are more complex, but gaining popularity in private limited companies.
 
4.    Unapproved Share Schemes
If HMRC schemes are not available or not suitable, a company can still look to put in place income-taxed arrangements including non-tax advantaged options, phantom options, etc.  These are much more flexible arrangements as a company does not have to meet any qualifying criteria or seek elections/approval from HMRC. They are, by their nature, less tax-advantaged than the HRMC schemes detailed above. Income tax will be charged when an individual makes a gain.

Effects of COVID when considering Share-based Incentives
For many companies, share values will now be lower and there may be changes in business strategies, for example, there may be more focus on short to medium-term plans rather than long-term strategies.  Many companies will have reduced workforces.  There may be cash constraints on the company.  All these things will require consideration before determining the best options for a company. 
Although there were no CGT changes in the recent budget, it is important to get the commercial structure right, so the incentive gives the best available tax outcome, even if tax benefits change.

Effects of COVID on EMI Schemes
In terms of EMI schemes, which are one of the most popular type of share-based incentives schemes, the qualifying criteria for companies is briefly as follows:
·         £30m gross asset limit; and
·         250 employee limit
It may be that due to COVID, a company’s gross asset value has reduced and/or the employee numbers may be lower due to a reduced workforce.  So a company which may not have qualified for EMI previously, may now qualify. MLP Law can help and advise you on selling your business. ‘

Please speak to our Commercial team if you would like more information regarding this article or for other advise on 0161 926 9969 or email us commercial@mlplaw.co.uk.