Corporate & Commercial Law Archives - MLP Law

Hit the road Jack… Is it time to sell your company?

“Rising costs have created a “ticking timebomb” for UK small business owners”, the chairman of the Federation of Small Businesses (FSB) has warned, with almost half a million firms at risk of going bust within weeks without a fresh wave of government support.

“Three-quarters of small to medium sized companies are worried about the long-term impact the cost of living crisis, soaring energy bills and rising inflation will have on their business”, according to a recent Barclays’ SME Barometer.

Following COVID and Brexit and with the ongoing labour shortages, transport issues, fuel and energy price increases, interest rates rises, increased inflation and generally the increased costs of living and running a business, could this be the time to sell your company?

Scrutinise your business

Take an honest and objective look at your business. What has the last few years meant for your business? Where do things currently stand? Reappraise your business and consider the challenges, what has not been working, how you see the future of your company and how you see your industry moving forward.

Is it time to sell?

If your business is really struggling and you cannot see a way forward, or if you have decided that it is time to move on, retire, look at other opportunities or sail off into the sunset, it’s important to look at your exit plan as soon as possible.

Preparing for an Exit

1. Appoint the right team of people to look after your sale including solicitors, accountants, tax advisers and other professionals

2. Consider available tax reliefs

3. Determine the value of the Company and how much you actually need if you are looking to retire

4. Company Health Check/pre-sale due diligence – Few business owners are ready for the sale process and advance preparation, away from the strict timetable of the deal itself, can be really useful, particularly as the sellers have to continue running the business during this busy and difficult period

5. Structure of the sale – should it be a share sale or an assets sale? Please refer to our blog Buying or Selling a Business: Shares or Assets

6. Accounts / Financials – Consistent monthly management accounts may be more important to a buyer than a company’s annual audit/accounts. Your accountants can assist to determine a fair price for your business and ensuring your accounting records are up to date

7. Isolate any investment assets from the business

8. Lock in and incentivise your key employees

MLP Law can help and advise you on your exit plans and preparing for a sale. Please speak to our Corporate Team on 0161 926 9969 or email us at corporate@mlplaw.co.uk.

What is the ‘UKCA mark’ and does it affect you?

As of 1st January 2021, the ‘UKCA’ (UK Conformity Assessed) product marking replaced the use of the ‘CE’ marking for products being placed on the market in Great Britain (England, Wales and Scotland).

By way of a recap, these are administrative markings which demonstrates conformity with health, safety, and environmental protection standards for products sold within the relevant territory (the European Economic Area (EEA) in relation to the CE mark, and Great Britain in relation to the UKCA mark).

Note, the UKCA does not apply to goods being sold in Northern Ireland.

UKCA / CE Marking – compliance

The technical requirements which you need to meet for the UKCA marking are largely same as the CE marking requirements. If you have previously needed to use CE marks therefore, we do not anticipate there being significant, if any, change for you in this regard. However, in any event, we recommend that a full review of the new UKCA rules is undertaken in respect of each of your relevant products, to ensure you are fully compliant going forward. 

Below, we have set out the key requirements which you must adhere to, to ensure compliance:

  1. UK Declaration of Conformity

As with products marketed in the EEA, you will also need to prepare a UK Declaration of Conformity in relation to the UKCA marking. As expected, this declaration will be largely the same as what was previously required, and should include details such as:

  • a description of your product, and identification of it (e.g. its serial number);
  • the name and address of the body involved in assessing the conformity of your product (if required); and
  • details the applicable legislation with which your product complies.

2. Using the UKCA marking

Like the CE mark, you must apply the UKCA mark to your products. There are certain requirements you must also adhere to:

  • the letters forming the marking must be of a certain size;
  • the marking must be at least 5mm in height (unless any exemptions apply – please let us know if you would like us to check if this applies to your products under UKCA); and
  • the marking must be visible.

3. Technical documentation

You must keep documentation to demonstrate that your products conform with the UKCA requirements. These records should be kept for at least 10 years after they are placed on the market. Again, please let us know if you would like further advice about your record keeping requirements.

How we can help

To determine whether your products are compliant under the UKCA regulations, a full analysis of your products and the applicable legislation relating to them will need to be undertaken.

If you think you require advice on this and if you would like us to advise on the product marking requirements for any products you sell, please contact our Commercial and IP team on 0161 926 9969 or commercial@mlplaw.co.uk  to receive expert legal advice for your business.

Commercial & IP Team March 2021

MLP Law Ltd.

Beyond COVID: Strategies for SMEs

Welcome to our series of blogs, addressing post-lockdown issues from a legal perspective.  This week sees the first blog, from our MLP Corporate team, looking at Strategies for SMEs.

Our blogs over the coming weeks will address a full range of topics across all our services – including our corporate, employment, commercial property, private client and family departments –  as we explore various post-lockdown challenges and opportunities.

It has been a very difficult 12 months for all businesses, but perhaps none more so than SMEs (small to medium sized enterprises).  Although some sectors have been hit harder than others, many SMEs have been left struggling to survive. 

So what could the future look like post-COVID?  How can businesses plan?  We have set out below some very brief ideas for a strategy for SMEs coming out of lockdown restrictions, moving forward and hopefully, looking to thrive.

Take stock

Take an objective and honest look at your business.   What has the last 12 months meant for your business?  Where do things currently stand?  What is the position on finances, employees, trading and other key aspects of the business? 

Help

Take all the help and advice and assistance available, including government help in terms of the ongoing furlough scheme and other grants and loans and seek professional advice to assist with your plans for the business

Reassess

Reappraise your business and consider what has gone well, what has not been working and how you see your industry moving forward.  Prepare a new Business Plan, revise your targets and objectives, consider where you see the business going and what you need to do to achieve these goals

Invest

Although finances may be tight, is it a good time to invest, particularly in areas such as technology?  The last 12 months has shown a significant move towards online business and working from home, so investment in areas such as technology are likely to make good business sense

Vary

Consider if you should diversify your business, perhaps looking at similar goods or services that could be offered or a different sector that your business could expand into

Exit

Is it time to sell?  If your business is really struggling and you cannot see a way forward, or if you have decided that it is time to move on, retire, look at other opportunities or sail off into the sunset, start to look at your exit plan.  This could involve seeking a third party purchaser, getting an existing management team interested in an MBO, transferring your interests to family members, or winding up the company.  At this stage, it is important to take professional advice as to what may be the best option for you.

If you have any questions on any of the above, please get in touch with a member of the Corporate team by emailing corporate@mlplaw.co.uk or calling 0161 926 9969.

Families in Business and Family Businesses Post Lockdown – What Now?

Welcome to our series of blogs, addressing post-lockdown issues from a legal perspective. This week we hear from our Family Enterprise specialists in our MLP Law Corporate and Commercial team.

After the turbulence over the past months and some businesses having fared better than others, the next few months and planning the medium to long term is crucial to all business. Particularly so for family businesses, to ensure they maintain balance and harmony within the family group as well as the business. This article considers the key issues family businesses should be considering as we come out of lockdown and progress through the year.

Key considerations:

How does everyone in the family feel, and have their perspectives on medium term goals and ambitions changed? Misaligned expectations are the common cause of disputes and tension, simply assuming people want to get ‘back to normal’ is a mistake. It is important to consider what the new normal looks and feels like for everyone in the family dynamic.

How do the senior management team in the business feel?  (everyone in the business is important, this article is considering the top level, board, shareholding and family aspects of post lockdown planning). What are their plans and have their perspectives and ambitions changed?

What are the short and medium term plans for the family owner managers?  Retirement, a willingness to lighten the grip on the reigns (and who takes hold) or earlier exit from the day to day running of the business are very possible outcomes as people reflect on the last 12 months.

We’ve been helping family enterprises for decades and, in particular over the last few years, helping manage transition within the business as roles and responsibilities shift as time passes. As we all know, your view, priorities and goals now are not necessarily going to be the same in 5 years, 10 years or longer.

Reviewing those changing dynamics now will set the business and family unit in good stead.

In particular, the family enterprise (how the family operates as distinct from the business) needs to consider how the roles in the business, in the family and around ownership and sharing the wealth generated by the business will change now, in 5 years and in the 10 years or more. There are a number of ways to do this successfully. We know that the most successful family enterprises adopt an open collaborative approach to the review, involving as many individuals as possible in the family dynamic. 

A successful review should explore the below, amongst other issues:

A consideration of those that may be looking to retire (and when).

Is the distribution of the wealth being generated in line with the family’s stated values?

Are the values and aims of the family enterprise still relevant or do they need to adapt to the new normal?

What are the likely roles for the younger generation in the business (if any) in the future and is there likely to be an appetite from them to take up these roles?

How will the family support the younger generation / young adults in the family in pursuing their future careers and endeavors?

These challenges and questions are not new, but the challenges thrown up over the last 12 months or so means that it is likely that everyone has or will reflect on and reset their values and goals, consider their futures against their values and seriously consider if what they are doing and going to do, truly aligns with their long-term goals and values.

Facilitating and enabling these discussions early on in an open and honest way with each other – their immediate family and wider family, in any business is crucial now as it has ever been.

We can help businesses and business owners address and facilitate those conversations. In particular:

Are the non-family senior managers in the business fully engaged and being rewarded and valued? If not, how do you address that?

Are there clear succession plans in place?

Is the distribution and share of the wealth generated fair and transparent (salary, dividend income, capital wealth)?

What is the timescale for the next transition of ownership and roles – family and business (whether retirement, through children taking senior roles, or younger generation being introduced into the business) What processes are in place to make that happen successfully?

When was last time the vision of values and any charter or constitution of the family enterprise was reviewed?

We can help with these and many other issues both inside and outside the business.

If you would like any help with the issues raised please contact our expert family business advisers on corporate@mlplaw.co.uk or 0161 926 9969. Click here for more information and to review your business’ vulnerability score.

Directors Duties

This last year has been very unpredictable for many UK companies. Exiting from the European Union on 31st January 2020, coinciding with the unprecedented pandemic of Covid 19, we have seen even the largest of businesses be heavily impacted ie. Boohoo’s takeover of Debenhams and more recently, the news that Thorntons chocolatiers will close all its UK shops.

With this in mind, are you fully aware of your directors’ duties towards your Company, specifically with regards to insolvency? Let’s take a look…

1. You have a Statutory Duty:
  • to act within your powers;
  • to promote the success of the company;
  • to exercise independent judgement;
  • to exercise reasonable care, skill and diligence;
  • to avoid conflicts of interest;
  • not to accept benefits from third parties; and
  • to declare interest in a proposed transaction or arrangement.
2. Other duties a director is responsible for:

Confidentiality

  • a duty of confidentiality to the Company

Insolvency

  • Wrongful trading
  • Fraudulent trading
  • Disqualification

NOTE: The UK government introduced some temporary measures relating to wrongful trading for UK private limited companies. Please see our Corporate Insolvency and Governance Act 2020 blog here for further details on this.

You can also view our in depth blog on Directors Duties and Responsibilities here.

If you require any help or advice, please speak to our Corporate and Commercial team at on 0161 926 9969 or email corporate@mlplaw.co.uk.          

Indemnities in Acquisition Agreements

What are indemnities?

Indemnities are promises by one party (usually the seller) to be responsible for and reimburse the loss of the other party (usually the buyer).  The principle is that it should be used in situations where it is unfair for the buyer to bear this loss.

The purpose of an indemnity is to move the risk of a specific matter from the buyer to the seller and provide the buyer with pound for pound compensation in respect of this loss.

What do indemnity clauses look like?

There are two types of indemnity clauses you may see in an acquisition agreement:

  1. Specific Indemnities clauses – these are more common and are sometimes included to cover specific risks identified in the buyer’s due diligence on the target company and which are of particular concern. They generally cover historic tax issues and can cover issues such as litigation, employee claims, environmental risks and product liability matters
  2. Indemnity basis of claim clauses – these are harder to identify for the untrained eye and are rarely justified in an acquisition.  These seek to allow the buyer to recover for any breach of warranties on an indemnity basis, rather than the usual breach of contract claim.

What are the advantages of using indemnities for a buyer?

  • Recovery is easier, as a debt claim, rather than a claim for breach of contract (depending upon how the clause is drafted) and effectively give the buyer a £ for £ recovery for the loss
  • All losses are recoverable, regardless of the foreseeability or remoteness of such loss
  • There is no obligation on the buyer to mitigate the loss
  • They can be used in circumstances where a breach of warranty may not necessarily give rise to a claim in damages
  • Liability under the indemnity is often unlimited, so there is no cap in value and they are usually not subject to the other limitations on the liability of the seller included in the acquisition agreement
  • They are not subject to disclosures made by the seller
  • In addition to the loss, it will usually cover all costs and expenses incurred

What are the issues of using indemnities in Acquisition Agreements?

A typical indemnity clause will detail the specific issue/event/liability triggering the indemnity and describe the loss the seller should be responsible for.  The details of the issue triggering the indemnity is usually uncomplicated but the loss to be paid by the seller is less straightforward and will depend upon how the clause is drafted. 

Indemnities may be drafted too broadly, trying to cover any breach of contract, even those that would be unlikely to give rise to any material loss or claim.  In most acquisitions or sales, only specific indemnities should be considered and the extent of these negotiated.

You have to consider the allocation of risk between the parties.  There is often a presumption that, where an indemnity has been given by a seller to a buyer, the buyer is blameless and should be fully recompensed if an indemnified risk occurs, even though the buyer may have contributed to the risk materialising.

An indemnity is not the only means for a buyer to recover its loss.  A buyer will always have the right to bring a claim for damages resulting from the seller’s breach of warranty/contract, subject to any limitations on liability agreed between them in the agreement.  Courts will consider the claim based on the facts, whether the loss was reasonably foreseeable and if the buyer took steps to mitigate the claim and reduce the impact of the loss.

The key points to take away are:

  • In most cases, indemnities should only be used to cover specific, identified risks or liabilities of particular concern to the buyer
  • Consider the fair allocation of risk between the parties
  • Consider the extent to which the seller is insured against the risk they are being ask to indemnify
  • Ensure that scope of the indemnity given is clear and not too broadly drafted

Please see our previous blog on Warranties and Indemnities in Acquisition Agreements for information about the differences between warranties and indemnities.

If you have any questions on any of the above, please get in touch with a member of the Corporate team by emailing corporate@mlplaw.co.uk or calling 0161 926 9969 and we will be able to talk through your specific needs and our various flexible pricing options.

Management Buyout Series

Part 1: The Pros and Cons

What is a Management Buyout?

A management buyout (MBO) is a transaction where the core management team of a company work together to buy a company, or part of it.

Advantages of an MBO

There should be a limited due diligence exercise as the management team already know the business

The sale process can often be quicker and easier than a third party sale

May be easier to agree a price for the business as the seller knows who they are negotiating with and the managers know the business

There is decreased risk of confidential or sensitive information passing to a third party

Warranties and indemnities given by the seller in the sale agreement are likely to be limited compared to a third party sale

Good option for sellers who have no succession plans or for businesses that are too small to attract a trade buyer

There is likely to be less disruption to the company as the business will effectively continue as usual with the same management team

There is generally better performance and commitment from members of an MBO team acquiring the business

Disadvantages of an MBO

Seller may get a lower valuation for the business than could be achieved through a trade sale

It is likely that the management team may struggle to raise sufficient finance between them

The management team will need to raise external finance through bank, equity investment or other means and often a combination of these

External funding will put financial pressure on the business

An equity team will want some control over what can/cannot be done without their consent and the team needs to be aware of handing over too much control to an investor

The team needs a good mix of experience at management level for the team to operate well as business owners

The team needs to be able to work together and agree how decisions will be reached, if there will be a leader (Managing Director) and what happens if someone wants to leave, etc.  Many of these issues should be dealt with in a shareholders’ agreement

There is potential for conflicts of interest if the managers become too concerned with their own investment and their role as shareholder rather than their role as employee and what is un the best interests of the company

If you have any questions on any of the above, please get in touch with a member of the Corporate team by emailing corporate@mlplaw.co.uk or calling 0161 926 9969.

Data Protection In a Post Lockdown Workplace: Are You Prepared?

As we contemplate a return to the office, we have noticed that a number of clients have not properly aligned their key policies. For example, their Return to Work Policy may provide that temperature checks may be taken to test for Covid-19 symptoms. However, we often find that clients fail to update their Data Protection Policy too, to take into account the increased use of sensitive personal data.

MLP can help you align your policies with each other to avoid any conflicts or non-compliance.

For the past year, remote working has become the norm in an effort to halt the spread of Covid-19. Now that the vaccine roll out is well underway, and cases are dropping significantly, a return to life as we knew it is looking more and more promising. To this effect, many employees will no doubt welcome an increased return to the office on a more regular basis.

Despite the vaccine rollout however, the fight against Covid is far from over.

It is still too early to ascertain just how effective the vaccine actually is. For instance, even though someone gets the vaccine, there is still a chance that they could catch Covid, have no symptoms, and pass it on to someone else.

As an employer, you will be required to implement measures to halt any future outbreaks of Covid among your employees, at least for the time being. This may involve ongoing testing – such as lateral flow tests, temperature checks, and employee declaration forms.

Needless to say, ongoing monitoring such as this brings with it a range of privacy issues, which must be considered.

See below for a few FAQs relating to employee data and your responsibilities.

Please also see our blog by our Employment Team for further information:  https://www.mlplaw.co.uk/coronavirus-and-the-gdpr-2/?sf_paged=2&_sft_category=employment-and-hr

1.If I carry out workplace testing, do I need to consider data protection laws?

Yes. By undertaking testing, you will be collecting and processing data relating to your employees’ health. Under the GDPR, this is considered to be sensitive personal data, which requires additional safeguards. For example, you should implement security measures to ensure that such information cannot be made available to unauthorised individuals.

At the very least, all data must be handled lawfully, fairly, and transparently. We recommend providing any employees who are tested with a privacy statement setting out how their data will be used and how it will be protected. If you are planning to undertake workplace testing, we recommend you update your privacy policy accordingly; please let us know if you would like assistance with this.

You may also want to consider undertaking a Data Protection Impact Assessment, particularly if you have never processed sensitive personal data such as health data before. Again, we can assist with this and advise on the additional steps which you can take to ensure this data is processed in accordance with the GDPR.

2. Am I allowed to ask my employees if they have symptoms?

Yes. The Information Commissioners Office (ICO) has stated that you may ask your employees about symptoms if you have a good reason to do so. However, you should bear in mind the ‘data minimisation’ principle; only collect the minimum amount of information you actually need. Again, consider setting this out clearly in your privacy policies.

3. Can I ask my employees if they have Covid symptoms?

Yes. Under the ICO’s guidance, given the current circumstances, it would be reasonable to ask your employees to let you know if they have symptoms. On a wider note, you should consider the regulatory guidance as issued by the government in relation to your particular sector when deciding whether to ask your employees if they have symptoms. Again, from a data protection point of view, you still need to bear in mind the data minimisation principle – i.e. only collect the minimum amount of data that is needed. For example, only ask your employees to disclose if they have symptoms of Covid, rather than about their health in general.

Conclusion


As it is likely that many of us will be making a more frequent return to the office over the next couple of weeks and months, we recommend that you consider how you will ensure the ongoing protection of your employees. If you are required to monitor your employees through health checks or declaration forms, we strongly advise you update your data protection policies and procedures to ensure full compliance with the GDPR.

How can we help?

If you think you may need assistance with updating your data protection policies, or if you require advice on the nature of data you should (or should not be) collecting from your employees, please contact our Commercial and IP team on 0161 926 9969 or commercial@mlplaw.co.uk  to receive expert legal advice for your business.

Unsolicited marketing: we all moan about it…but is it a case of Pot, Kettle, Black when it comes to your approach to marketing?

Most of us at some stage have expressed frustration about receiving unwanted marketing calls, trying to sell us something we do not need or are remotely interested in. Chances are, many of those organizations are contacting us foul of The Privacy and Electronic Communications (EC Directive) Regulations 2003 (PECR). 

However, is there a chance that your organization’s marketing practices could also put you at risk?

Overview

Although the introduction of the GDPR was arguably one of the most high profile shake-ups of privacy laws in recent years, a perhaps lesser well known, but equally important, set of privacy rules, is PECR. Having been adopted in 2003, PECR came long before the GDPR or the Data Protection Act 2018. The PECR now sits alongside the GDPR and sets out guidelines on unsolicited marketing using electronic communications i.e. by telephone, email, or text. 

It’s important firstly to note the difference between solicited and unsolicited marketing: 

  • Solicited marketing is when your customer has asked you to send them a specific type of marketing information. 
  • Unsolicited marketing is when you send your customer marketing information that they have not specifically asked for. So, even though they may have ‘opted in’ to receive marketing information from you, this simply means that they are not opposed to receiving such information in the future – regardless of the content. 

If you undertake solicited marketing, then the PECR will not apply to you, as it does not restrict this form of marketing. However, if your organization sends unsolicited marketing messages, you will need to ensure you comply with PECR – or risk incurring a hefty fine.

So, can you continue sending your customers unsolicited marketing?

Put simply, under PECR, consent to receiving marketing messages is needed before you send any unsolicited marketing material. 

This consent needs to be given knowingly and freely, and you need to provide information about your organization and the method of marketing you wish to use (e.g. by telephone, email, or text). The customer must take positive action to confirm their consent. This could mean, for example: ticking a box, adding a consent button on your website linking to an ‘opt-in’ page, or completing an online consent form. Whatever method you use will depend on your organization and your usual course of business with your customers – however, as stated above, the main thing to bear in mind is that the consent must be given freely. 

Once consent has been obtained, you should keep a record of which customers gave it, the type of marketing they wish to receive, and how they want to receive it. This is important, as if there are ever any complaints against your organization, you will be able to show that you were compliant and hopefully avoid incurring a fine. 

Finally, you need to remember that customers have the right to withdraw their consent at any time. As such, you need to provide the option for them to do so in all your communications with them. This could be as simple as a statement saying ‘if you wish to no longer receive any marketing from us, please click here’

What will happen if you don’t comply?

Non-compliance with PECR can result in hefty fines of up to £500,000. Sanctions for breaches of PECR are enforced by the Information Commissioners Office (ICO), which can fine you up to £500,000.

The ICO’s powers are wide-ranging, however, and a lot of factors will be taken into account as explained in its current Regulatory Action Policy.  

For example, they will consider factors such as the nature of the breach and how serious it is, the number of people affected, and how much their privacy is invaded. Aggravating factors include your organization’s attitude to non-compliance – have you been intentionally negligent and reckless in their approach to marketing? Equally, the ICO may also take mitigating factors into account, a consider, for example, what steps have you taken to minimize any damage caused by affected individuals. 

Things to consider

If you or your organization sends any form of marketing material out, firstly consider whether it is unsolicited; if so, we recommend you review your current marketing practices to determine if you are PECR compliant and, if not, take immediate steps to ensure you are. 

How we can help

In light of the above, are your current marketing practices compliant under PECR? 

If you think you require advice on this and if you would like us to review your current marketing regime to ensure you are compliant, contact our Commercial and IP team on 0161 926 9969 or commercial@mlplaw.co.uk to receive expert legal advice for your business.

Share-based Incentives for Private Companies

When a company is considering share-based incentives for employees, it is key to take appropriate advice and determine an effective plan.  An effective plan must consider both the commercial design and the tax treatment of the structure.  Although many consider the tax structure as the most important feature of any share plan, the tax efficiency should be less important than the commercial purpose of the plan.

Purpose of the incentive plan?

Consider what is the main purpose of the plan and what is the company looking to achieve:

  • Recruit and retain staff
  • Incentivise staff
  • Enforce good/positive behaviours
  • Reward performance
  • Support the culture of the company
  • Enforce the structure of the company and employee based ownership
  • Performance based or only exercisable upon an exit event

Once a company has considered the above and determined the main purpose(s) of the plan, then advisors can look at tax structures which best suit what a company is looking to achieve.

The purpose of a plan will differ from company to company and, in light of COVID, an existing plan or a proposed plan may not have the same commercial impact.  For example, due to the labour market in the COVID crisis, the recruitment and retention of staff may be less important, but incentivising the right behaviours in staff may be more important.  So existing plans should be reviewed, in addition to these considerations given to proposed plans.

Different types of plans

  1. EMI Schemes

These are one of the most popular share-based incentive plans and are often the best approach.  They are very flexible and very tax efficient.  However, they are not available to all companies, due to the qualifying criteria, which we look at briefly later in this blog.  These are a HMRC plan.

  • CSOP, SAYE and SIP

These are alternative HMRC plans.  They are less flexible than EMI but still provide capital gains opportunities and income tax reliefs.

  • “Geared Growth” Arrangements

These refer to growth shares and similar arrangements introduced more recently by HMRC.  They allow for income tax to be chargeable at the outset (if elections are made), then capital gains tax if performance is high (so valuation is key).  These are more complex, but gaining popularity in private limited companies.

  • Unapproved Share Schemes

If HMRC schemes are not available or not suitable, a company can still look to put in place income-taxed arrangements including non-tax advantaged options, phantom options, etc.  These are much more flexible arrangements as a company does not have to meet any qualifying criteria or seek elections/approval from HMRC. They are, by their nature, less tax-advantaged than the HRMC schemes detailed above. Income tax will be charged when an individual makes a gain.

Effects of COVID when considering Share-based Incentives

For many companies, share values will now be lower and there may be changes in business strategies, for example, there may be more focus on short to medium-term plans rather than long-term strategies.  Many companies will have reduced workforces.  There may be cash constraints on the company.  All these things will require consideration before determining the best options for a company. 

The Chancellor, Rishi Sunak, announced in July that there will be a review of capital gains tax and this may have the effect of reducing the tax benefit of some/all incentive arrangements, so we will need to await the outcome of this review.

This emphasises the importance of getting the commercial structure right, so the incentive gives the best available tax outcome, even if tax benefits change.

Effects of COVID on EMI Schemes

In terms of EMI schemes, which are one of the most popular type of share-based incentives schemes, the qualifying criteria for companies is briefly as follows:

  • £30m gross asset limit; and
  • 250 employee limit

It may be that due to COVID, a company’s gross asset value has reduced and/or the employee numbers may be lower due to a reduced workforce.  So a company which may not have qualified for EMI previously, may now qualify.

Concerns have been raised about disqualifying events under EMI and whether individuals on furlough or whose hours have been greatly reduced could be disqualified.  However, HMRC have confirmed that these risks will not affect qualification if due to COVID.

If you would like more information or if you have any questions or queries relating to the above, please contact Rachel Owen from our Commercial and Commercial team on 0161 926 1579 or rachelo@mlplaw.co.uk to receive expert legal advice for your business.