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A MASSIVE MARKETING campaign has recently been launched by the Inland Revenue in an attempt to revive the all employee share ownership plan.
By re-christening it the share incentive plan, the Revenue hopes that it will become infinitely attractive. This may or may not prove to be the case but, in the meantime, the vast majority of smaller companies are still choosing selective share schemes, whether approved or unapproved, rather than share incentive plans
This article considers the need to keep on top of the administration of selective employee share arrangements.
Potential advantages
Most advisers understand the benefits of employee share schemes for their clients. The tax breaks with enterprise management incentives and, to a lesser extent, the company share option plan are significant. In addition, the employee relations aspect cannot be understated. For these reasons, more and more advisers are pushing their clients towards allowing at least a small element of their share capital to be offered to employees.
While many advisers are familiar with the various types of scheme and are able to help their clients to choose and implement those schemes, this is often the point at which their interest ebbs.
Good administration
It is important under the current, often prohibitive, legislative régime to take matters a stage further. Not only is it vital that schemes are implemented correctly, but the subsequent administration of the scheme should be part and parcel of any offering.
Administering employee share plans is neither rocket science nor is it riveting. However, if it is overlooked, or if mistakes are made, then companies expose themselves to massive financial risk and embarrassment in the face of the people they are trying to benefit, namely their employees.
In the worst cases, companies will not only be fined for failure to report allocations of shares or options to the Revenue, they will also potentially jeopardise the approved status of their employee share plans with the consequence that these could lose all the tax benefits that such status affords.
There can also be other practical problems that arise if companies are not on top of their share scheme administration. For example, companies which do not keep a tight rein on the plans that they operate could risk the fraudulent exercise of options by former employees. As the happy employees skip off into the sunset having made a tidy sum, the company could be left not only in a position where it is powerless to rectify the situation, but facing a tax liability that it may not be able to recover. Ultimately, the shareholders will also suffer due to the unnecessary dilution of their holdings. To make matters even worse, the issue of insider dealing could also be raised by the appropriate authorities where a company loses control over who was permitted to exercise their options and at what time.
Advisers and companies must therefore administer employee share schemes correctly. The areas for them to consider at this point are what records need to be kept, how often they should be updated, who will be carrying out this work and how the records should best be kept.
Information
Various pieces of information must be kept in respect of all individuals participating in a plan on a mandatory basis. These include:
- the employee's name;
- the employee's National Insurance number;
- the name of the employing company;
- the relevant tax office;
- the tax office's reference number;
- the country of tax residence;
- a note as to whether the employee is a director or not.
In respect of options granted, the information that is required is:
- the name of the plan;
- whether it is approved by the Revenue;
- the number of options granted;
- the date of grant;
- the option price;
- a note as to whether options were granted at a discount to market price;
- details of any performance conditions.
Where employees are given direct equity incentives rather than options over shares, for example under an award of equity through a long-term incentive plan, again it is important that the correct information is supplied. While there is no statutory guidance as to the necessary information for unapproved share incentive schemes, broadly the information detailed above as adapted for direct shareholdings will be appropriate.
In respect of a Revenue approved scheme, there will be specific forms that have to be filled in every year to ensure that the Revenue is aware of transactions that have taken place. At the risk of stating the obvious, trying to put this information together in arrears is much harder than keeping correct records and updating them regularly.
It is important to ensure that records are updated on a constant basis. It is not good enough just to update these records when the options are granted. It is sensible to carry out a monthly or quarterly update to reflect any changes. This might include information with regard to employees who have left the company, as well as exercises of options and, where applicable, other taxable events, for example on changes of rights over options or release of options.
Where employees have left the company, it is important to ensure that there is a full understanding on the part of both the employee and employer as to whether any rights continue following termination of employment and on what date they will cease.
Useful to others
The records that are kept may be of use to various parts of the organisation.
An option register will need to be made available to a company's finance department in order to enable it to prepare statutory accounts. This is one of the documents that the company's auditors will wish to inspect. In a larger company, the treasury department may well wish to analyse the register to ensure that the company's exposure to future National Insurance liabilities (where no joint election has been made with an employee for the transfer of liabilities) is covered.
The company secretary will keep a close eye on these records to ensure that there are sufficient authorised and unissued shares available for future exercises of options. Further, in the case of a quoted company it is important to make sure that all listing requirements are complied with and in particular that shares have been listed in advance. The company secretary will also oversee any transactions in relation to the plan to ensure that no insider dealing takes place.
The payroll department has a part to play as well. It is likely to be responsible for the completion of Revenue returns, forms P60 at the year end and forms P11D, and these can only be completed correctly if the department has access to share scheme information.
DIY administration
The way in which records are maintained will depend upon the complexities of the plan and the number of participants in it. The company will have to consider when implementing a plan whether anybody in-house has the relevant experience and expertise to ensure that the plan is administered correctly.
Many companies administer plans themselves using spreadsheets and, while this is often adequate, it should be approached with caution. Unless the plan has under twenty employees and is restricted to one grant a year, it is unlikely to be a satisfactory solution. A company with fifty employees, for instance, could be involved in thousands of transactions over five years.
Once options mature (typically three years after they have been granted), participants will start to exercise options. This moves the company into a new element of record keeping and there is a danger that the humble spreadsheet or its worthy operator will collapse under the strain.
One alternative is for companies to invest in specialist software. However, this is only appropriate if there is a suitably experienced share plan administrator in-house. Software is expensive, and is usually only cost-effective for plans where there are at least 250 participants.
Not worth the risk
Furthermore, if a company fails to apply pay-as-you-earn correctly, then there is a danger that it could become liable for the income tax liabilities of its employees. The legislation in this area is notoriously uncertain, and an embarrassed employer might not be willing to seek recourse and repayment from valued, key employees. The position is even worse where there is a dispute with a former employee or where a former employee has disappeared from the face of the earth.
It is vital that companies ensure that not only do they get good advice when they wish to set up their schemes but also that they are completely in control of administration.
Shelley Doorey is a director of the Share Option Centre Ltd, www.theshareoptioncentre.com. This is a team of chartered secretaries experienced in the operation of discretionary share plans. She can be contacted on 020 7247 8777. Philip Fisher is the employee benefits partner at Chantrey Vellacott DFK. He can be contacted on 020 7509 9453 or by e-mail: pfisher@cvdfk.com.
