We hear plenty of talk from government about the need to stimulate private enterprise, destroy bureaucracy and removing the need for unnecessary paperwork. You would have thought, therefore, that something which is at the very heart of private enterprise, like issuing shares to employees and directors, should be dead simple. The reality is that it isn’t and there are plenty of traps for the unwary.
On top of this, issuing shares to employees is one of those things that often sounds a great idea in theory but when looked at in more detail doesn’t always stand up to scrutiny. We’ve looked before at some of the considerations.
The aim of this blog is to look at bit more of the detail and the specific points to watch for. A number of these are tax related so we have had the input of Corrigan and Associates in putting this blog together. They are a firm of accountants and tax advisors who specialise in advising young entrepreneurial businesses, you can find out more about them here.
If you issue shares for less than their market value watch out for income tax and national insurance: if shares are issued to employees or directors for less than their market value then the employee may be liable to pay income tax on the difference between the price paid and the market value and the employee and the company may be liable to pay national insurance.
You can’t give the shares away: with companies incorporated in England and Wales their shares all have a nominal value (this could be anything, but £1 or a penny are common values) and with very few exceptions this nominal value must always be paid as a minimum. In many cases the market value of the shares is higher than this nominal value. In this case you may want the employees to pay a higher price. This is fine – what you can’t do is let them pay less than the nominal value for their shares.
Get the formalities right: the new Companies Act was meant to make routine things like issuing shares a lot easier. For some companies (in particular, if they were incorporated after 1st October 2009) this is the case but there are plenty of caveats and exceptions. So get whatever advice you need to make sure the formalities are complied with, don’t wing it:
Be aware of what you need to file: once you issue the shares you will need to carry out a few admin tasks:
Find out what a form 431 election is: we are getting into fairly complex tax issues here and the detail is beyond the scope of this blog. Our good friends at HMRC are always on the look out to ensure that people are paying enough income tax and aren’t issuing shares as a way to avoid this. So there is a complex web of tax legislation which aims to prevent this. Maybe this is fine in theory but the complexity of the legislation coupled with the law of unintended consequences means that even normal, plain vanilla issues of shares to employees at market value can give rise to potential issues. I came across a good article here which gives the detail ….. see what we mean about complex.
Think about what should happen if employees leave: it is not ideal for ex-employees to continue to hold shares:
Unless there are some specific provisions in a shareholders’ agreement or the company’s articles (i.e. its constitution), once shares are issued there is no way to force an employee to sell his shares if he ceases to be an employee. It is definitely worth considering whether the company should include these provisions (commonly referred to as leaver provisions) in a shareholders agreement or its constitution.
Think about the need for a shareholders agreement and the articles: leaver provisions are a key thing to consider but there are other specific provisions to include in shareholders agreements and your company’s articles. These include: