any PH lawyers with a good grounding in company law?

[Anatol]

I'm after professional advice on issuing shares to employees so that they can be paid a profit share via dividend.

Given that the risks involved include losing control of the company if this is got wrong, I'm not going to do it myself.

Any PH lawyers who have some experience with this sort of thing, (and who are prepared to charge an hourly rate that suits a husband-and-wife company! ) please drop me a PM?

Thanks,

Tol

[Eric Mc]

As long as the shares issued do not exceed 50% of the total shareholding, you will still retain control of the company.

If the shares issued to employees are between 10% and 50%, they will acquire some minority rights so would have a limited say in company decisions.

If the share issued stay below 10%, they have no real power at all.

You COULD issue a different class of "non-voting" shares to staff - entitling them to a dividend but giving them no voting powers.

You do need to be aware that HMRC are vety touchy these days about paying people dividends instead of salary andn they often require that any share based payments be reoported to them.

[Anatol]

My intention is to require the purchase of the shares - not give them away, and to create a class of share for them to have no voting rights but an *entitlement* to a yearly dividend, to be completely non-transferable, redeemable on demand by the directors, and for the employees to have a maximum number they can hold based on length of service.

The employees in question *will* receive a market-rate salary, this is for an incentive bonus system - I'm not looking to inappropriately avoid paying NI.

I appreciate it's an issue to be careful with - hence the request for professional input - thanks for your advice

Tol

Edited by Anatol on Thursday 4th March 09:53

[Eric Mc]

I don't know an awful lot about this area and you probably do need to talk to both a solicitor and a tax specialist.

[JustinP1]

Anatol said:

My intention is to require the purchase of the shares - not give them away, and to create a class of share for them to have no voting rights but an *entitlement* to a yearly dividend, to be completely non-transferable, redeemable on demand by the directors, and for the employees to have a maximum number they can hold based on length of service.

The employees in question *will* receive a market-rate salary, this is for an incentive bonus system - I'm not looking to inappropriately avoid paying NI.

I appreciate it's an issue to be careful with - hence the request for professional input - thanks for your advice

Tol

Edited by Anatol on Thursday 4th March 09:53

I can't see what the benefits are to an employee.

Why would your employee want to buy a share in your company that gives them no voting rights, cannot increase in value because they cannot sell it, and you can call in when you wish? Finally, should you go bust they lose their cash?

They would get better value just buying shares somewhere else. I am not sure that kind of scheme would have any takers.

I can understand it if these shares were handed out as an incentive - but even then the exact things that give shares 'value' is the rights you are taking away from them.

It would be more transparent and a lot easier to organise a 'profit-share' scheme for performance related pay.

[superlightr]

dont think you can do a non transferable share and redeamable on demand of the directors.

Be easier to just give a % of the profit as a bonus each year

[Soovy]

superlightr said:

dont think you can do a non transferable share and redeamable on demand of the directors.

Be easier to just give a % of the profit as a bonus each year

This. Just pay them a cash bonus.

[JonRB]

I've got to say this is the most stingy share offer I've ever heard of. You're asking your employees to "buy" something that doesn't become theirs, can't appreciate in value, gives them no real benefits, and can be taken away again.

Why not just take a dump on each of their desks? It would be cheaper and possibly less insulting.

Edited by JonRB on Thursday 4th March 11:35

[therealpigdog]

Have you considered giving the shares a right to participate in any sale (i.e. no "daily" rights, but a % of sale price)? If not, the shares look pretty worthless tbh and might be better just to give a cash bonus.

If you are certain an employee share scheme is the way to go, then speak to your accountants and solicitors to get it done properly. I'm happy to help, but not local to you. I can recomend a couple of firms in your neck of the woods if you would prefer someone closer - alternatively, your accountant should be able to point you in the right direction.

[Roofas]

JonRB said:

I've got to say this is the most stingy share offer I've ever heard of. You're asking your employees to "buy" something that doesn't become theirs, can't appreciate in value, gives them no real benefits, and can be taken away again.

Why not just take a dump on each of their desks? It would be cheaper and possibly less insulting.

Edited by JonRB on Thursday 4th March 11:35

ROFL

[wattsm666]

You should look at EMI (enterprise management incentive) share options, can be useful to tie employees in as they can have a stake on a sale/exit and can give favourable tax advantages to the company. You need to speak to your accountant. In terms of performance related pay/incentive given the employment related securities issues it is probably easiest to pay cash bonuses.

[JustinP1]

JonRB said:

I've got to say this is the most stingy share offer I've ever heard of. You're asking your employees to "buy" something that doesn't become theirs, can't appreciate in value, gives them no real benefits, and can be taken away again.

Why not just take a dump on each of their desks? It would be cheaper and possibly less insulting.

Edited by JonRB on Thursday 4th March 11:35

There has been few things that I have ever laughed at on PH.

That is one of them.

[Anatol]

JonRB said:

I've got to say this is the most stingy share offer I've ever heard of. You're asking your employees to "buy" something that doesn't become theirs, can't appreciate in value, gives them no real benefits, and can be taken away again.

Why not just take a dump on each of their desks? It would be cheaper and possibly less insulting.

Edited by JonRB on Thursday 4th March 11:35

Astounding, even for PH.

Ok, since you've decided to fill in the blanks for yourself, I'll give you the actual background, though I doubt given your performance so far that you have the capability to update your opinion based on actually having the facts.

We are a him-and-her company, with a share capital of two shares of £1 each. Our employees get a market wage, and aren't entitled to any profit share (or expecting one). The company is now profitable and I want to give them a share of the profits as a reward and motivation for the future. I don't want to give them a share of turnover or anything similar - I want to link their reward, and hence hopefully motivation to the actual accounting profits of the company. I reckon about 20% of the profits is what I want to give.

Dividends exist to get post-tax profits out of a company, hence why I'm looking to use this. I'm looking to reward and motivate employees, not make them owners of the company - hence creating a class of share with guaranteed dividend rights, but no voting rights.

Our interim accounts for the first 6 months of the year showed profits of just under £40k. So a very conservative estimate of our full year's profits is £50k.

So, we'll have to pay corporation tax of 20% on that. So £40k of post-tax profits. 20% of that is £8k. If they took up shares based on length of service, we'd likely have one employee with 4 shares of the class to be created, and one employee with 1. Given that the ownership shares are £1, the advice I've had is that it will be fine for the employee shares to also be £1 shares. So their buy in costs a fiver.

I'm talking about *giving* them £8k - so why the hell am I asking them to *buy* the shares? Because if I give them the shares, they are a benefit in kind, and the dividend is taxed.

Why are they redeemable? Because they're for employees who are in our employment. If they leave, they get their pound back, and lose their employee incentive. That's pretty standard.

So, the long service employee this way, pays £4, and gets £6400. The short service employee pays £1 and gets £1600.

No tax to pay (if they are BR tax payers). No NI.

If I pay them a salary bonus - well, we still have to pay corp tax first. The payment will reduce *next* year's corp tax burden, but that doesn't help with this payment. And then they have to pay PAYE, and both employer's and employee's NI come out of it. So out of the 20% of post-tax profits ring-fenced for them, they'd get about *half*.

I'm looking to give our employees a minimum of £8k that they're not contractually entitled to, and not expecting. I'm looking to do it in a way that means HMRC gets as little of the money as is legal.

Explain to me how that is stingy or insulting?

Or maybe you rushed to judgment without all the facts, and if you have any intellectual honesty, now feel as much of a tit as you look.

Tol

[JonRB]

Anatol said:

Ok, since you've decided to fill in the blanks for yourself, I'll give you the actual background, though I doubt given your performance so far that you have the capability to update your opinion based on actually having the facts.

You're making a lot of assumptions there. I've been a Company Director for over 10 years now. I'm perfectly aware of the difference in tax between dividends and PAYE / NI.

If you wish to give your employees a PRP bonus then simply do so. There's no need to dress it up as a share issue with so many strings attached.

And, as Eric has said, HMRC take a very dim view of dividend arrangements that are fairly obvious Tax Avoidance. Granted, Tax Avoidance (as opposed to Tax Evasion) is legal but you will still attract greater scrutiny.

Anatol said:

Or maybe you rushed to judgment without all the facts, and if you have any intellectual honesty, now feel as much of a tit as you look.

I don't feel a tit at all.
Your original post did not in any way suggest the value for money of the share buy-in. I made a flippant post based on the available information, completely tongue-in-cheek and designed to get a laugh. Judging by Justin's post I achieved that.
For the information given you could have been paying pennies per share and expecting the employee to be parting with non-trivial sums to buy them.

Finally, it's you that looks the tit for publishing your Tax Avoidance plans in great detail on a public forum.

Edited by JonRB on Thursday 4th March 16:43

[Anatol]

JonRB said:

I don't feel a tit at all.
Your original post did not in any way suggest the value for money of the share buy-in. I made a flippant post based on the available information, completely tongue-in-cheek and designed to get a laugh. Judging by Justin's post I achieved that.
For the information given you could have been paying pennies per share and expecting the employee to be parting with non-trivial sums to buy them.

Exactly - there was no information on the relative value, so concluding that it was stingy and insulting was at the very least premature. You did get a laugh, so maybe I misread your seriousness. Lack of smilies perhaps.

JonRB said:

Finally, it's you that looks the tit for publishing your Tax Avoidance plans in great detail on a public forum.

I'm trying to stay within the law - hence why I've got no concerns about asking the question in public - the idea of asking here was to get relevant professional advice, and put some business the way of another PH'er. If it ends up being not workable or legal, it hasn't hurt to find out. I didn't even comment on the "put some cash in their hands" suggestions - that's not the way I work.

There are schemes exactly like this in operation, and lawyers who specialise in drafting the relevant share issues. As far as I can tell, it can be set up to be both legal and tax efficient. If there's an administrative burden to set it up, I don't mind paying that if it saves my employees money.

Tol

Edited by Anatol on Thursday 4th March 16:44

[JonRB]

Anatol said:

the idea of asking here was to get relevant professional advice, and put some business the way of another PH'er.

Fair enough.

By the way, Corporation Tax rates have been 21% for Small Businesses since 2008.

[Anatol]

JonRB said:

Anatol said:

the idea of asking here was to get relevant professional advice, and put some business the way of another PH'er.

Fair enough.

By the way, Corporation Tax rates have been 21% for Small Businesses since 2008.

Thanks. We've used up all our retained losses from starting up, so this year we'll have to pay some for the first time...

Tol

[therealpigdog]

am sure eric or similar will clarify - but will the "redeemable on demand" effectively reduce the dividend payment to a discretionary bonus?

anyway - if you do want to talk through the legals, drop me a PM. not going to comment on stinginess or give tax advice - more qualified people on here in both departments

[JustinP1]

Anatol, that is quite a clever idea now you have explained it.

However, to be fair to Jon, it didn't quite sound that way to start with!

[DanX5]

Having an employee 'buy' the shares for the nominal value and then pay a significant dividend thereafter may well be seen in itself as being an item chargeable as employment income (i.e. PAYE & NIC) rather than a dividend under the Employment Related Securities legislation. See http://www.hmrc.gov.uk/manuals/ersmmanual/ERSM9006...

Either that or HMRC could contend that the value of a share upon which the company then pays a dividend of x% of company profit has a market value of its own (despite having no voting or equity rights) and the employee could pay PAYE (and possibly NICs) thereon.

Either way, you need to include such issue of shares to employees on 'Form 42' post 5th April in year of issue. You have to be fairly explicit as to the rights attached to such shares issued to employees so such restrictions as 'non-voting' are spelt out to HMRC so will not go un-noticed. Significant penalties payable by employer for non-completion of form 42.

Having said all of the above we have had seen cases where employer pays their senior employees tens of thousands via 'non-voting' b,c,d,e class shares (i.e. one set of share per employee, no rights other than dividend at Director's discretion) in addition to (crucially) a market rate PAYE salary. Company has been through PAYE enquiry and Corporation Tax enquiries with no issue (the employee shareholders did of course pay HR income tax on their SA tax returns but no employer/employee NICs so HMRC could have well taken issue). In this case the shares were argued not to be an employee reward, but an opportunity to enjoy in the company profitability over and above their worth as an employee........not saying that this argument would be won on every occassion though, depends on circumstances and overall motive (which if this is avoidance of NICs then HMRC will be quite aggressive in approach).

Granting of EMI options certainly worth thinking about as a 'tie-in' but is only really a piece of paper until exercised so if the immediate issue is to pay a bonus then I guess the options are pay via PAYE (and issue EMI option at same time as a tie-in) or risk the dividend on new shares route as you plan (but don't forget it is you as employer who will be significantly out of pocket if HMRC find this to be PAYE and NIC'able - say you pay £8k net, HMRC will look to you as employer to settle by grossing up the PAYE at 20/40% and employee / employers NICs at 11% / 12.8% respectively - so could cost you something like £4k on top of the £8k in worst case scenario).