By Andrew Niblock, Consultant Solicitor at Keystone Law

Nick Clegg’s recent speech, in which he promoted the idea of greater employee ownership for British businesses, has led to a renewed interest in staff share schemes that allow employers to offer workers a stake in the future of their company.

Many of the country’s largest employers already have share incentive schemes in place, but Mr Clegg’s proposal goes further and raises the idea of staff being given the right to actually request shares in their company. The coalition is currently looking at options to simplify the legislation that governs the schemes, with a view to encouraging their wider use.

There are still relatively few companies that are wholly owned by their employees, with John Lewis being perhaps the best known. However, for businesses that want to encourage a degree of staff ownership, there are a number of different HMRC approved share schemes, four of which are briefly highlighted below.

Save As You Earn (SAYE)

This is the most popular type of scheme and comes in two parts. Firstly, a savings arrangement is set up for a fixed period of 3, 5 or 7 years into which the employee makes contributions of between £5 and £250 per month. This is normally deducted straight from their pay (after tax). At the outset, the employee is also granted a share option agreement, with a fixed, discounted share price that they can exercise with the proceeds at the end of the savings arrangement. As with all schemes, there are a number of HMRC restrictions that apply, so it is important that the company takes proper advice early on.

Company Share Ownership Plan (CSOP)

A CSOP scheme allows certain qualifying employers a tax effective way to offer share options to their employees. A written option agreement sets out the fixed price of the option shares, which must not be less than the current market value and must be agreed with HMRC. It is usually a requirement that the options cannot be exercised for at least 3 years so that the maximum tax relief can be obtained. An employee may not normally hold more than £30,000 in unexercised CSOP options.

Enterprise Management Incentives (EMI)

EMI options are designed to be offered by small to medium size businesses with fewer than 250 staff and gross assets of less then £30 million. There is a written agreement between the company and the employee, setting out the price of the option shares and how the option can be exercised. Employees can only hold a maximum of £120,000 of EMI options at any one time, but the schemes are popular because of the favourable tax treatment that they attract.

Share Incentive Plan (SIP)

A share incentive plan differs from the other schemes because the employee is given actual shares from the outset rather than options. A trust is set up to hold the employee shares and the Company can give the shares free, (up to £3,000 a year) or allow the employee to buy shares (up to £1,500 a year). The shares must be held in the trust for 5 years to gain maximum tax relief. Again restrictions apply to the type of Company that can operate a SIP scheme.

Things to Consider

An expansion in employee share ownership may have many advantages, but there are a few considerations for both companies and employees.

A key question is whether employee shareholders will actually have any significant say in the decisions that a company makes? Certainly in larger companies it may well be that, whilst employees could receive a small financial benefit from their dividends, they wouldn’t necessarily feel much more involved just because they own a few shares.

Thought also needs to be given as to how a share scheme deals with employees who leave a company. Provisions, such as good and bad leaver clauses, need to be considered.

Finally, there is the relative exposure that an employee may have by buying shares in just one company. John Lewis has been used as an example of successful employee ownership. Rather less has been said about the employee shareholders at Northern Rock who didn’t fair quite so well.

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