Rachel Owen, Author at MLP Law

Case Study: mlplaw Facilitated the Sale of Three Different Insurance Brokers Businesses

mlplaw’s Corporate Team, led by Rachel Owen, had the privilege of representing the selling shareholders in three distinct transactions involving insurance broker businesses. The common thread among these transactions was the sale of shares in each company to the same buyer, Deva Risk Group Limited.  We successfully navigated the intricacies of each deal, ensuring a successful outcome for our clients.

Transaction 1:  Sale of a majority shareholding in Hornby Snape Insurance Services Limited

Acting for the selling shareholders in the sale of shares, we negotiated terms for the shareholders exiting the business including the warranties and limitations of liability provisions for the sellers and terms for future earn-out. In addition, we acted for the shareholder remaining in the business under the direction of the buyer and negotiating terms for his position both as a shareholder and a director.

Transaction 2:  Sale of the entire issued share capital of Much Ado Limited

Acting for the sole shareholder in the sale of the entire issued share capital of the company, being a general insurance broker.  This included negotiating deferred payment terms and security for these, suitable warranties and limitations and tax provisions, together with a new service contract for the seller with the buyer.  This transaction was successfully completed in June 2023.

Transaction 3:  Sale of the entire issued share capital of Gomm (2000) Limited

This transaction went through various reforms before finally being agreed and completed as the sale of the entire issued share capital of the company in September 2023, with the selling shareholder also taking an equity stake in the buyer, adding an additional layer of complication. The target company was again a general insurance brokers.

Collaborating with the brokers (Brokerring Limited) and the buyer’s legal team on each transaction, we ensured compliance with and consent from the FCA and ensured good communication and open negotiation, culminating in successful conclusions for our clients.

mlplaw has acted on numerous other insurance broker transactions in the last 3 years and is currently working one two sales and one acquisition.

How to Sell your Company

Is it time to sell your company?

Scrutinise your business and make an honest and objective assessment.  Where do things stand and how do you see the future?  Whether your business is struggling, you want to retire, move on, or look at other opportunities, it’s important to make an exit plan.

Preparing for an Exit

  1. Get your house in order – Few companies are completely up to date with all their records, financials, compliance, etc and so these should be checked and updated to ensure they are correct and compliant before you start the sale process.

 

  1. Get valuations and tax advice – You’ll need your accountants to obtain a value for the company and tax advice to ensure you obtain all available tax reliefs.

 

  1. Appoint the right team – Accountants and tax advisers should be involved at an early stage of the exit plan. Once an offer has been made for the Company/business, it’s important to instruct a legal team who are experienced in the sale (or acquisition) of companies and can guide you through what is often a long and complicated process, making things as simple and painless as possible.

The Legal Aspects of Selling your Company

Preparation Phase:

  1. Heads of Terms – these should set out the principal terms of the deal agreed between the sellers and the buyer.

 

  1. Confidentiality/Non-Disclosure Agreements need to be in place with the prospective buyer at an early stage.

 

  1. Legal Due Diligence: The buyer’s legal advisers will often send a very lengthy set of questions covering all aspects of the company to undertake their review and you will need to spend considerable time answering questions and uploading all relevant documents and supporting information to a virtual data site.

Structuring the Deal:

  1. You’ll need to consider whether to sell shares or assets. For more information on the differences between these, please see our blog Buying or Selling a Business: Shares or Assets https://www.mlplaw.co.uk/buying-or-selling-a-business-shares-or-assets/

 

  1. Purchase Agreement – usually the buyer’s solicitors prepare a share purchase agreement (or asset purchase agreement) which will be a comprehensive purchase agreement negotiated between the legal professionals, specifying terms, price, payment, warranties and obligations, etc.

 

  1. Disclosure Letter – disclosure is the process whereby sellers make disclosures against the warranties they give in the Sale & Purchase Agreement and such disclosures will, where appropriate, qualify the warranties.

 

Completing the Deal:

Once all the key documents have been prepared, negotiated and agreed and the buyer has the relevant funds to make the purchase, the documents can be signed and exchanged.  Often in corporate transactions, exchange and completion will be simultaneous, although there may be an exchange with completion conditional upon certain conditions being met.

 

Selling a company requires careful consideration of legal aspects. Engaging legal professionals and addressing issues proactively will enhance the likelihood of a smooth sale. Seek tailored legal advice from solicitors with suitable experience in these transactions throughout the process to ensure success.  For assistance with any enquiries relating to the sale of your company (or the acquisition of a company) please contact corporate@mlplaw.co.uk

 

 

EMI Schemes and how the 2023 Spring Budget can help your Small – Medium Business

The Corporate team look at the benefits of Enterprise Management Incentive Schemes and how the 2023 Spring Budget aims to streamline them to help small and medium sized businesses.

 

The 2023 Spring Budget introduced several measures to support small and medium-sized businesses/enterprises (SMEs), one of which was to simplify the qualifying conditions for Enterprise Management Incentive schemes (EMIs) from as soon as 6 April 2023.

 

What is an EMI?

 

An EMI is a scheme whereby a company grants share options to a number of its employees. A share option is essentially the right to buy a set number of the company’s shares in the future at a price fixed at the date the option is granted.

 

What are the benefits of an EMI?

 

For an employee, if they’ve been granted options and their company’s share value goes up, they can exercise their option and sell their shares, making significant profit without paying income tax or national insurance on this.

As such, for an employer, such a beneficial scheme is a useful tool to attract and reward (and thereby retain) selected members of their workforce.

 

Why has the 2023 Spring Budget 2023 introduced changes?

 

In March 2021, the government put out a Call for Evidence regarding EMIs. Their findings highlighted that certain elements of the schemes were unnecessarily restrictive for SMEs and undermined the purpose of the policy i.e. to help SMEs incentivise and retain staff.

Accordingly, the 2023 Spring Budget changes aim to rectify this.

 

What are the changes?

 

Effective from 6 April 2023

 

  1. Companies no longer need to set out the details of any restrictions on option shares in a share option agreement.

Requiring such detail was found to cause problems during due diligence exercises should the company be sold.

 

  1. Companies no longer need to declare that an employee signed a working time declaration when they were issued an EMI option.

This step was deemed to be unnecessary; employees will still need to meet a working time requirement, but this is included as a provision within the EMI option contract.

 

Effective from 6 April 2024

 

  1. The deadline to notify HMRC about an EMI option will be extended to 92 days following the date it is granted.

(The longer-term plan is to change this deadline into one annual notification per company of any new EMI options granted across the year, which will further simplify the process.)

 

If you would like further information and advice on EMIs from checking whether your company qualifies for one all the way to help setting one up, please do not hesitate to get in touch on 0161 926 9969 or corporate@mlplaw.co.uk.

mlplaw closes ‘John Lewis’ style NHS deal

Altrincham-headquartered MLP Law has advised an NHS GP practice on a transition deal to incorporate the practice to a limited status while simultaneously making it an employee-owned business – the first time an individual GP practice has moved to this model in the UK.

MLP worked alongside the Employee Ownership Trust and NHS Somerset to develop the deal, which sees the Minehead Medical Centre in Somerset become an employee-owned entity, the first deal of this kind in the UK. MLP acted for the transferee company and the ongoing GP shareholders.

The deal safeguards the future of general practice in the town of Minehead by changing the business model, passing risk from the GPs themselves to the incorporated company – which should support GP recruitment efforts in the area.

Stephen Attree, managing partner of MLP Law, said: “This was an exciting and innovative deal which represents a new way of thinking within the NHS. By taking proven models such as employee ownership and applying them to a public sector body, NHS Somerset and Minehead Medical Centre have made history in their area and created a modern approach to GP services that will protect the provision of NHS services in the Minehead area.

“The deal involved a number of parties working closely together to bring this complicated case to a successful close,” he added.

Ed Ford, the GP who has led the development of the employee-owned trust at Minehead Medical Centre said: “We have a fantastic management team and wider staff team, so partners at the practice felt we should give them more control of the business. We also wanted to ensure that the business structure shouldn’t rely on individuals holding shares that could be difficult to transfer if people wanted to leave – hence the idea of becoming an employee-owned trust (EOT).

“EOTs offers GP practices an alternative, more flexible operational model; offering staff a greater say in how GP practices are run and opportunities for the team to develop their careers by having a greater leadership role, without needing to have the funds to invest as a partner.”

The plans were debated at NHS Somerset’s primary care commissioning meeting in June, and received a unanimous approval from the board, ahead of the deal completion. The value of the deal has not been disclosed.

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.

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.

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

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.

Employee Ownership Trusts

What is an Employee Ownership Trust (EOT)?

The EOT was introduced by the Finance Act 2014 as a particular type of EBT that meets certain statutory criteria. This works in conjunction with certain tax benefits that became available for both companies and individuals. The purpose was to encourage the creation of employee-owned companies as an alternative to a trade sale.

Why consider employee ownership?

  • Employees are more engaged with and committed to the company
  • Likely to improve productivity and performance
  • Builds a shared culture and collaborative way of working
  • Can be a solution to ownership succession
  • Owners can have a partial exit but stay involved
  • Owners can allow employees to continue their legacy
  • Tax reliefs for retiring owners and employees

What tax reliefs are available?

  • The initial sale of shares to the EOT is exempt from capital gains tax (CGT) 
  • The company under EOT control can pay bonuses to employees of up to £3,600 per year per individual free of income tax
  • EOT has the same inheritance tax reliefs (IHT) as other employee trusts

Potential drawbacks

  • There are significant tax disincentives to a subsequent sale of the company, so careful consideration must be given to the long term plans
  • The EOT must obtain and retain a majority stake (the ‘controlling interest’ requirement) so trustees must hold more than 50% of shares and voting rights of the company
  • The ‘all employee benefit’ requirement means it must apply to all employees on the same terms, so no discretion as to participation or terms
  • The ‘trading’ requirement – must be a trading company or holding company of one
  • There are stricter rules and criteria than an EBT or other trusts
  • Not suitable for all companies

Establishing an EOT

Usually, the EOT or the trust company established to hold the shares as a corporate trustee will acquire a controlling interest in a company, purchasing shares from individual shareholders. Usually, payment will be on deferred terms, although shares may on occasion be gifted. There will need to be a valuation exercise to ensure the correct value is being paid. 

There is no CGT payable but the trustees do need to justify the price they paid for the shares and there must be a realistic prospect of being able to make repayment. There will be a sale and purchase agreement detailing the terms of the sale. Articles of association will need to reflect the shares, whether they are all the same class or different classes. The trust deed will be a key document and will set out how the trust is to work, how assets/funds are to be held, how they can be used, and how distributions can be made. 

If you would like more information or if your 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.

Share Incentives: A Brief Overview of Employee Benefit Trusts and Employee Ownership Trusts

What is an Employee Benefit Trust (EBT)?

An EBT is a discretionary trust usually set up by a company for the benefit of the employees. A trust refers to the legal relationship created by a person (the settlor) when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. 

The trust property of the EBT is held by a trustee for the benefit of a class of beneficiaries, which is usually employees and former employees. Usually, the employer company will set up the EBT, unless there is a group of companies, in which case usually the ultimate parent company will constitute the EBT, but an EBT can be established by an individual or a company.

Why establish an EBT?

There are several reasons why companies establish EBTs, such as:

• to acquire and hold shares for the purpose of providing awards under an employee share scheme

• to store a number of shares for the purposes of benefitting employees

• to enable bonuses in cash or shares to be deferred

• to act as a co-owner of shares (with employees) under a joint share ownership plan

• to provide an internal market for company shares

• to protect against increases in share price when granting awards under an employee share scheme

• to provide a buyer for shares which a seller (usually a departing employee) is required to sell under share plan rules, the company’s articles of association, or a shareholders’ agreement

There are tax benefits for establishing an EBT, including certain inheritance tax reliefs and capital gains tax reliefs.

What is an Employee Ownership Trust (EOT)?

The EOT was introduced by the Finance Act 2014 as a particular type of EBT that meets certain statutory criteria. This works in conjunction with certain tax benefits that became available for both companies and individuals. The purpose was to encourage the creation of employee-owned companies as an alternative to a trade sale.

What tax reliefs are available?

  • an exemption from capital gains tax (CGT) on certain disposals of shares to an EOT
  • limited relief from income tax on bonuses—up to £3,600 per year per individual paid by an employer company owned by an EOT
  • relief from inheritance tax (IHT) on certain transfers into and from EOTs

Conditions to be an EOT

  • the trading requirement – must be a trading company or holding company of one
  • the all-employee benefit requirement – must apply to all employees equally
  • the controlling interest requirement – trustees must hold more than 50% of shares and voting rights of the company

For a more detailed look at both EBTs and EOTs, subsequent blogs will follow in this Share Incentives series.

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.