Any business will need to ensure that it rewards its management and employees proactively to ensure that those currently with the business stay with the business and those that the company may wish to attract to the business are encouraged to do so.
One element will be the financial reward structure at the company which will typically have three elements; cash, benefits in kind and equity participation.
The split of the total package across these various elements will be important in determining the personal tax liabilities for the individuals concerned and the amount of work the company will need to do to deal with tax compliance.
There is not too much which can be said with regard to cash – any amounts paid in cash or cash equivalent will be taxable on the employees in accordance with the PAYE regime.
There is raft legislation which deals with the taxation treatment of benefits in kind. The most important starting point is to appreciate that anything an employee receives as a result of their employment will give rise to potential tax liabilities. The amount of the liability will depend upon the nature of the benefit in kind and whether or not there is any specific legislation which deals with it.
There are also some benefits which do not give rise to tax liabilities: childcare vouchers, season ticket loans, bicycles provided under cycle to work schemes, being three of the more common such benefits – there are others so always check.
Common taxable benefits in kind are items such as; private medical cover, sports club membership where the taxable benefit for the employee is the cost to the employer of providing the facility.
One issue which has always caused problems is reimbursed expenses. These in theory need to be reported as a benefit in kind. It is then up to the employee to make a claim on their personal tax return that such expenses are for business purposes and should not therefore be taxed.
It is perhaps worth mentioning that an employer can pay for up to £8,000 of relocation costs for relocating employees without this giving rise to a taxable benefit for the employees concerned.
There are some complex rules to deal with the following:
- Cars and vans and fuel provided for private purposes. In essence the extent of the tax liability is driven (no pun intended!) by the emissions of the vehicle and its value.
- Living accommodation provided by an employer;
- Assets made available to employees – holiday homes, yachts etc. will give rise to a taxable benefit equivalent to 20% of the value of the asset concerned;
- Beneficial loans received by shareholders and employees; and
- With each of these benefits care is needed to ensure that each separate benefit is dealt with correctly as material tax liabilities can arise if errors are made.
All taxable benefits in kind must be returned on form P11D after the end of each and every tax year. This can be a considerable burden for companies. However, HMRC until recently enabled employers to agree a PAYE dispensation which effectively meant certain items need not be reported. Typically a dispensation would have covered: reimbursed expenses solely for business purposes, fixed allowances, business mileage costs and anything which would not give rise to a tax liability for the employee.
However, a new regime is being introduced which will do away with PAYE dispensations and instead require employers to deal with certain benefits in kind through the PAYE system. I will cover this is a later blog.
One increasingly important way in which individuals can be rewarded is by giving them a minority equity stake in the company they work for.
This can be used as an incentive to both encourage staff to join the business and work hard whilst there knowing that the value of their stake will hopefully increase with the effort they put in.
An equity stake may also help to discourage key personnel from leaving the company.
If shares are simply given to employees they will have an income tax liability by reference to the value of the shares they receive – not much of an incentive unless the company puts the employee in funds to pay the liability with the payment of a bonus say. The payment of a bonus can prove costly for the company though when looking at the cost on a ‘grossed up’ basis.
Equally it is not particularly attractive asking individuals to pay the market value for the shares, even if it is a heavily discounted value because it is a minority stake, in order to avoid an income tax liability.
HMRC have recognised the need to create a tax framework for employee equity participation which enables share incentives to be provided to individuals without creating unwelcome tax charges for the recipients.
There are now a range of approved share incentive arrangements which achieve this end result.
For large companies, with many hundreds of employees, there are a range of possibilities: Share Incentive Plans, SAYE option schemes, Employee Shareholder Schemes and Company Share Option Plans. However, all these require HMRC approval and are most appropriate for larger companies.
For OMBs in many cases the above schemes are not appropriate primarily because of the cost and administration which accompanies the implementation and running of the schemes.
The main alternative for OMBs, which meet the activities, gross asset value and employee tests, is the Enterprise Management Incentive scheme. This is an HMRC ‘approved’ share option scheme with some significant tax breaks for individuals and flexibility for the company.
I will not go in to all the conditions which are relevant suffice it to say that an EMI scheme does not need formal HMRC approval – unlike the three schemes mentioned above. The only HMRC input is seeking HMRC’s approval to the market value of the shares under option. The detail of the EMI scheme conditions is not relevant for this blog – please see my EMI Briefing Note on our website which gives more detail. There is also one which deals with the Employee Shareholder Scheme.
If an EMI scheme is set up and operated correctly it will enable a company to provide shares to employees in a manner where the tax liabilities for the employees can be managed, with appropriate planning, and will typically only result in a tax charge for them of 10% when they ultimately sell their shares.
I believe that an EMI scheme is a fantastic way in which companies can proactively incentivise their employees whilst retaining control of the shareholding base of the company.
How a company will choose to reward its management and employees will be dictated to a degree by the employee profile of the business. Whilst share incentives and benefits may be important for senior management it could well be that cash and suitable benefits is most appropriate for the more junior members of the team. However, whichever profile exists it is clear that there are plenty of opportunities for companies to reward staff in a variety of tax efficient ways.