The Wragge & Co Tax team tips for making the most of tax opportunities now and preparing for when the upturn comes.
Shares, not cash
Now is the time to think about introducing, or expanding, share-based incentives for employees: with share prices low, the cost of providing these incentives can be substantially reduced and the potential benefits increased. This can be a straightforward, cost-effective way to provide incentives to key employees who you want to make sure stay with you.
Two particularly useful ways to use shares to reward employees are:
Enterprise Management Incentive (EMI) options
These are tax-advantaged options available to most smaller independent companies (less than 250 employees, less than £30 million in gross assets). An option gives an employee the opportunity to buy shares later, at a fixed cost. Normally, there's tax to pay on the difference between that fixed cost and the actual market value of the shares when the shares are acquired by exercising the option - EMI options are usually tax free. As the exercise price is set at the current market value of the shares, which is likely to be low in the current economy, there's an opportunity for greater gains when the upturn comes – tax free. The key benefits are bigger gains for employees who stay on through to an upturn, no tax for the employee on the gain on exercise and no national insurance costs for the company.
If the company doesn't qualify to grant EMI options, consider giving:
Free or part-paid shares.
Employees receiving shares for which they pay less than market value (or get for free) are taxed as if they've got a tax-free loan from the company for the difference between the shares' market value and what they paid for the shares. HM Revenue & Customs (HMRC) treats tax-free loans as though there's a benefit in kind of the commercial rate of interest that would be charged on a similar loan: only that deemed interest is subject to tax. At the current rates of HMRC interest, the shares only cost the employee about 2% of their value in tax each year. That value would be fixed at the current low market values. The key benefits are more flexibility and a low-cost way for employees to get shares in a company.