Natural Resources companies and share plans
31 January 2020
This is the season to be reporting
The annual employment related securities (ERS) reporting season between 6 April and 6 July provides companies with an opportunity to make sure that they are operating and reporting their share plans correctly. Was PAYE operated correctly? Were tax elections made on time?
With up to eight worksheets and up to 40 columns of information to fill in, the form for “Other” plans may be time consuming to complete at a time when companies with limited in-house resources are already stretched. However, it enables companies to rectify mistakes such as when a participant fails to “make good” the income tax before it is too late.
It’s not all about EMI
Senior employees in smaller companies are eligible for generous tax reliefs under EMI share options. But what if you don’t qualify for EMI because you are the CFO of two natural resources companies and work 20 hours a week for each? Or you are a non-executive director with specialist skills and expertise?
There is a solution. Participants in early stage projects could receive restricted shares, rather than options, with minimal up-front cost or risk. Done correctly, this type of arrangement can still allow you to benefit from capital gains treatment on the growth in value of your shares and is a great way to remunerate and incentivise the key people in your business, avoiding any cash outflow. There are other tax-effective plans for larger companies as well, as shown in the case study below.
Case study based on one of our recent projects
Prior to an IPO, a Natural Resources group headquartered in Jersey and operating in the UK set up an EMI share option scheme. This provided its employees with a risk-free opportunity to share in the future growth. Further options were issued each year.
Five years later, the company was taken over by a private equity fund and the employees exercised their options cashlessly and accepted the offer. As the options were over two years old, as well as benefitting from the annual CGT-free exempt amount of £12,000, the employees claimed entrepreneurs’ relief on the taxable gain. This gave an overall tax charge of less than 10% for most employees compared to an income charge of up to 45% and employees’ and employer’s National insurance cost. And there was a corporation tax deduction for the employer.
The senior employees were invited to use some of their option proceeds to acquire shares in the acquiring group. The group put in place a Management Incentive Plan so that, when the next exit comes, the growth in value should be a capital gain. Given the typical high gearing for such arrangements, the shares will have a low value at the outset and a lot of scope for capital gains.
If you have any questions or would like to discuss any issues, please contact David Ogden.