Employee share schemes can provide a way to incentivise existing staff as well as attract new employees. They also offer employees a stake in the business which in turn will help to improve performance whilst preserving cash.
In our spring 2016 Health and Care Focus we looked at Employee Shareholder Status (ESS) as a potential employee share scheme for care operators. However, the generous tax advantages of this scheme were abolished for any new schemes not in place by 1 December 2016.
So, what other options are there for employers in the health and care sector?
Enterprise Management Incentive (EMI)
An EMI is an HMRC approved share option scheme and is generally only taxable on the employee on disposal. With no income tax or national insurance due on the grant or exercise of the options, an EMI can be a very tax efficient way to incentivise and recruit employees.
However, for residential care operators the opportunity to offer an EMI to its employees may be limited as one of the conditions is that the company must be carrying on a ‘qualifying trade’. Operating or managing a nursing home or residential care home is explicitly excluded from this definition. However, businesses which are generally able to utilise EMI schemes include:
- Domiciliary care (including supported living providers)
- Complex care in peoples own homes
- Foster care
- Education (depending on type of education and the legal structure)
For further details of the restrictions and tax advantages, see the comparison below.
Growth shares allow employees to participate in the future growth of the business. The individuals are awarded the shares from the outset but will only receive a return on disposal if a certain financial hurdle is reached. Care operators would have the flexibility to set the participation hurdle over which the employee could participate.
Such schemes are proven to help improve the performance of the business by giving employees a stake in the business and aligning both shareholder and employee’ interests. Generally, they have the same rights as ordinary shares such as voting and dividend rights.
Growth shares are more commonly used for start-ups or private equity backed businesses with significant debt such that the initial value of the shares is relatively low and has prospects for growth.
From a tax perspective there should only be capital gains tax on disposal of the shares. Appropriate valuation of the shares, as with any scheme, is also key.
Unapproved options do not offer the same tax advantages as an HMRC approved scheme or option; however, as a result, they are much more flexible and straightforward to implement.
Care operators could design the share scheme tailored specifically to fit their business and their employees, without having to meet specific conditions set with approved options. As mentioned, however, the downside is that they are likely to result in higher tax charges on the employee (see table below).
|Award or option ||Option||Award ||Option|
|Income tax/NI on grant||No||N/A ||No |
|Income tax/NI on exercise||No except if at less than market value or after 90 days of a ‘disqualifying event’||N/A
Yes, taxed on difference between market value and price paid on exercise|
|Capital gains tax on disposal||Yes on profit realised ||Yes ||Yes on profit above exercise price |
|Corporation tax relief||Yes ||No ||Yes |
|Company restrictions|| Gross assets of less than £30m, less than 250 employees, must be an independent company and have a qualifying trade||None
|Monetary limit|| £250,000 per employee, up to a maximum total of £3m||None||None |
|Employee restrictions|| Employees working fewer than 25 hours per week unless it equates to at least 75% of their working time. Employees owning more than 30% of the shares are also not eligible||
None but employees will only realise a profit on the shares where the valuation exceeds a pre-determined value||None
When implementing an employee share scheme there are many aspects to consider, including which employees to offer it to, an award or option scheme and HMRC approved or unapproved.
We can provide advice on the most appropriate employee share schemes for your business including design and implementation. We can also assist with share valuations and obtaining approval from HMRC where appropriate.
If you would like any further information or would like to explore what options there are for your business, please get in touch with a member of our team.