Fast Track to Growth: employee shares – beware!

Companies across Devon are being offered the chance to take part in the county’s first Fast Track to Growth Programme to help them develop and implement plans for growth in 2016 – for free. Fast Track to Growth has been developed by SouthWestfd, PR, Astley Media and Exeter Innovation Centre, and Stephens Scown is supporting the programme. Simon Morris, partner in the corporate team in Exeter, has written a series of articles to highlight certain challenges to successful business growth and how to overcome them. In this article, he explains how to issue employee shares.

Part 1

Is issuing shares to employees that simple? The short answer is “no” and there are some traps, many tax related, for the unwary. The below note scratches the surface and if in doubt take both legal and financial advice.

Do it properly, and get the formalities right: the board should approve the allotment and this should be documented in board minutes. You may also have to obtain shareholder’s consent to the allotment.

Once the shares are issued:

• the company’s statutory books will need to be updated and share certificates issued; and
• a return to Companies House will need to be made (Form SH01) – we can advise you on this. In addition some tax related administration will need to be undertaken (see below) – and your financial advisor should assist you on this.

Nothing is free: shares have a nominal value and invariably that nominal value must be the minimum amount paid. For example, £1 for an ordinary share of £1. But, if your business (which is owned by the company) has value, the actual “market” value of those shares will be higher than the nominal value. An employee can be asked to pay more than the nominal value, but not less.  Paying less than the “market” value will have tax consequences.

Issuing shares at less than “market value”: when a company issues share to employees (and this will capture directors too) at less than the “market” value of those shares, this may give rise to an income tax, and national insurance, liability in the hands of the recipient. That person could be liable to pay income tax on the price difference between price paid and “market” price. And that person, and the company, could be liable to pay national insurance.

Tax related filings: the big health warning here is speak to your accountant or financial advisor as it is likely that both the company and the employee will need to complete tax related returns such as:

• the company completing a form 42 in relation to every tax year in which shares are issued to employees or directors by virtue of their employment
• Form 431 election: if you are looking to use the shares as a way of remunerating employees, but without incurring the NICs and higher employment income tax which would attach to a salary or bonus, this may cause issues and there is a plethora of tax legislation which aims to prevent this.

In part 2 we will touch upon those other legal matters, such as articles of association and shareholders’ agreements, which should be considered in relation to the issuing of shares.