Are equity incentives an alternative?

Equity incentives, particularly share options, serve as powerful tools for fostering employee engagement and driving business growth, especially in the dynamic landscape of the tech sector. Whether you are a startup or an established player, navigating the complexities of share options requires careful consideration, particularly concerning tax implications.

At the heart of share options lies the aim to reward and retain talent without immediate financial strain. During the initial stages of business, where cash flow may be tight which could restrict the ability to pay high cash salaries, share options can be an attractive addition to help incentivise the right talent to join or stay with the business.

However, the tax landscape surrounding share options is multifaceted. Understanding the nuances can be pivotal to ensure that there are no unexpected tax liabilities. Among the tax-favoured share option plans, the Enterprise Management Incentive (EMI) is a discretionary plan which is often used due to its significant tax advantages for both employers and employees.

Unlike unapproved, or non-tax favoured options, with EMI options there are no income tax (“IT”) or National Insurance contribution (“NIC”) liabilities on the exercise of an EMI option that was granted with an exercise price equal to the shares market value on the grant date. This means that any growth in the value of the shares from the grant date would be subject to the preferential capital gains tax rates whilst still retaining the corporation tax deduction for the company.

Navigating these options demands meticulous attention to detail and compliance. For instance, ensuring that the company meets the necessary conditions and maintains its qualifying EMI status requires adherence to specific criteria, failure of which could lead to unexpected tax liabilities. It is essential to have expert guidance to ensure seamless implementation and ongoing compliance.

Within the tech sector, where intellectual property often plays a central role, additional considerations arise. The receipt of royalties or licence fees on third-party software or intellectual property could inadvertently jeopardise EMI qualification, emphasising the importance of getting the right tax advice.

The key takeaway for tech businesses exploring equity incentives and EMI options is clear: getting it right from the outset is paramount. While the potential benefits are substantial, the pitfalls of non-compliance can be costly and challenging to rectify down the line.

At MHA, we offer comprehensive support tailored to the unique needs of tech businesses. With a team boasting decades of collective experience, we provide a full suite of services including, tax advice, assistance with valuation and obtaining HMRC’s agreement to that value, as well ongoing compliance, we ensure that your equity incentive plans are not only effective but also compliant.