Employers

Share Ownership for Employees – EMI

Posted by Kath Docherty on October 16, 2017  /   Posted in Business start ups, Employers, Getting started in business

Enterprise Management Incentives (EMI)

Retaining and motivating staff are key issues for many employers. Research in the UK and USA has shown a clear link between employee share ownership and increases in productivity. The government has therefore introduced a variety of ways in which an employer can provide mechanisms for employees to obtain shares in the employer company without necessarily suffering a large tax bill. Provided the company meets the qualifying conditions, EMI can be one of the most tax efficient and flexible means available.

EMI allows selected employees (often key to the employer) to be given the opportunity to acquire a significant number of shares in their employer through the issue of options.  Whilst an EMI can offer significant tax advantages, the key driver for any incentive arrangement should be the commercial objectives of the business.

This factsheet outlines the rules for EMI.

Tax problems under normal rules

If shares are simply given to an employee the market value of the shares will be taxed as earnings from the employment. This is expensive for the employee as he may not have any cash to pay the tax arising.

In order to avoid this immediate charge, options could be granted to an employee. An option gives the employee the right to obtain shares at a later date. Provided that the terms of the option are that it must be exercised within ten years, any tax liabilities will be deferred until the time the options are exercised.

This may still be expensive for the employee if he is not then in a position to sell some of the shares in order to pay the tax arising.

What does EMI offer?

EMI allows options to be granted to employees which may allow the shares to be received without any tax bill arising until the shares are sold.

How does it work?

Selected employees are granted options over shares of the company. The options should be capable of being exercised within ten years of the date of grant.

In order to qualify for the income tax and national insurance contribution (NIC) reliefs, the options awarded need to be actually exercised within ten years of the date of the grant. There is also a statutory limit of £250,000 in respect of options granted on or after 16 June 2012, which maximises the value of the options which may be granted to any one employee. No employee may hold unexercised qualifying EMI options with a market value of more than £250,000. The market value is taken at the date of grant.

What are the tax benefits to employees?

The grant of the option is tax-free.

There will be no tax or NICs for the employee to pay when the option is exercised so long as the amount payable for the shares under the option is the market value of the shares when the option is granted.

The EMI rules allow the grant of nil cost and discounted options. However, in these circumstances, there is both an income tax and an NIC charge at the time of exercise on the difference between what the employee pays on exercise and the market value of the shares at the date of grant.

Following the acquisition of the shares, when the option is exercised, an employee may immediately dispose of, or may retain the shares for a period before selling them. At such time there will be a chargeable gain on any further increase in value. The CGT liability will depend on the availability of any reliefs and annual exemption.

  • CGT at the rate of 10% applies to gains where net total taxable gains and income are below the income tax basic rate band
  • CGT on any part of gains above this limit will be charged at 20%.

In certain circumstances, in respect of shares acquired through exercising EMI options, Entrepreneurs’ Relief may be available to reduce the CGT liability to 10%. Although the Entrepreneurs’ Relief conditions have to be satisfied they are modified so that:

  • the 5% minimum shareholding requirement does not apply
  • and the 12 month minimum holding requirement is allowed to commence on the date the option is granted.

These rules apply to shares acquired on or after 6 April 2012.

What are the benefits to employers?

  • Employees have a potential stake in their company and therefore retention and motivation of these employees will be enhanced.
  • Options will not directly cost the employer any money in comparison to paying extra salary.
  • There will normally be no NICs charge for the employer when the options are granted or exercised or when the employee sells the shares.
  • A corporation tax deduction for the employer company broadly equal to employees’ gains.

EMI: Points to consider

There are a number of issues to consider in deciding whether EMI is suitable for your company.

  • Does the company qualify?
  • Which employees are eligible and who should be issued options?
  • What type of shares will be issued?
  • When will the rights to exercise options arise?
  • The costs of setting up the option plans are not tax deductible.

Does the company qualify?

EMI was introduced by the government to help small higher risk companies recruit and retain employees with the skills that will help them grow and succeed. The company must therefore:

  • exist wholly for the purpose of carrying on one or more ‘qualifying trades’
  • have gross assets of no more than £30 million
  • not be under the control of another company (so if there is a group of companies, the employee must be given an option over shares in the holding company).

The main trades excluded from being qualifying trades are asset backed trades such as:

  • property development
  • operating or managing hotels
  • farming or market gardening.

Which employees are eligible and who should be issued options?

An employee cannot be granted options if they control more than 30% of the ordinary share capital of the company. They must spend at least 25 hours a week working for the company or the group, or if the working hours are shorter, at least 75% of their total working time must be spent as an employee of the company or group.

Subject to the above restrictions, an employer is free to decide which employees should be offered options. The sole test is that options are offered for commercial reasons in order to recruit or retain an employee.

What type of shares will be issued?

EMI provides some flexibility for employers. For example, it is possible to limit voting rights, provide for pre-emption or set other conditions in respect of shares which will be acquired on exercise of an EMI option. The shares must, however, be fully paid ordinary shares so that employees have a right to share in the profits of the company.

When will the rights to exercise options arise?

The options must be capable of being exercised within ten years of the date of grant but there does not have to be a fixed date.

Examples of circumstances in which the options could be exercised include:

  • fixed period
  • profitability target or performance conditions are met
  • takeover of company
  • sale of company
  • flotation of company on a stock market.

Options can be made to lapse if certain events arise, for example the employee leaves the employment.

How we can help

Whilst an EMI can offer significant tax advantages, the key driver for any incentive arrangement should be the commercial objectives of the business. There are a variety of alternative arrangements which can be used each with their own conditions and advantages. We can help you decide whether EMI is appropriate for your business and whether the business will qualify. Please contact us for advice on the best options available for your business.

Research and Development

Posted by Kath Docherty on October 16, 2017  /   Posted in Business start ups, Employers, Getting started in business

Research and development (R&D) by UK companies is being actively encouraged by Government through a range of tax incentives. The government views investment in research and development (‘R&D’) as a key to economic success. It is therefore committed to encouraging more smaller and medium sized (‘SME’) companies to claim R&D tax relief

The incentives are only available to companies and include:

  • increased deduction for R&D revenue spending and
  • a payable R&D tax credit for companies not in profit.

The government is committed to improving access to R&D highlights the need for more SME companies to understand what relief is available and how the process of claiming tax relief works. Recent changes to R&D scheme rates have increased the relief available so a clear understanding is needed to ensure that companies are aware of how the tax rules work.

What are the tax reliefs available for SME companies?

A company can claim enhanced deductions against its taxable profits for expenditure which is qualifying R&D expenditure. The amount of the enhancement has increased over the years. The rate was 125% for expenditure incurred before 31 March 2015 and has increased to 130% from 1 April 2015. This amount is in addition to the actual expenditure (ie a 230% total deduction from 1 April 2015). R&D enhanced relief represents an additional corporation tax reduction of 26% of the expenditure incurred.

If the R&D claim creates a tax loss, then the company may be able to surrender the loss for a cash repayment. This is 14.5% for expenditure incurred on or after April 2014. A surrendered loss could therefore give a repayment of up to 33.35% of the expenditure.

Where the company incurs qualifying R&D expenditure before it starts to trade, it can elect to treat 230% of that expenditure as a trading loss for that pre-trading period. The pre-trading loss created by the R&D relief can then be surrendered, as above, which could provide much needed cash flow for new companies.

Qualifying R&D capital expenditure incurred by a company would be eligible for 100% research and development allowance. Details of this allowance are not provided in this summary.

Example of R&D claim

A company has adjusted net profits of £50,000 before an R&D claim and allowable R&D expenditure of £70,000.

The enhanced claim is therefore £70,000 x 130% = £91,000.

Deducting this from the adjusted profits gives a loss of £41,000.

The company decides to surrender this loss for a cash repayment. The amount they would receive is £41,000 x 14.5% = £5,945.

Research and Development Expenditure Credit scheme (RDEC)

R&D relief under the SME scheme is not available if the R&D project has had the benefit of a grant or subsidy. There may, however, be an alternative claim available to the company. This is known as the Research and Development Expenditure Credit scheme (RDEC). RDEC allows the SME to claim a taxable credit of 11% of eligible expenditure. As this amount is taxable it is known as an ‘above the line’ credit. The government has announced an increase in the rate of the R&D expenditure credit which applies from 11% to 12% where expenditure is incurred on or after 1 January 2018. The credit received is used to settle corporation tax liabilities of the current, future or prior periods subject to certain limitations and calculations. Where there is no corporation tax due the amount can be used to settle other tax debts or can be repaid net of tax.

The RDEC relief is also available to an SME for expenditure incurred on R&D that is contracted to it by a large company.

Qualifying projects

R&D relief can only be claimed by companies that have incurred expenditure on qualifying R&D projects that are relevant to the company’s trade. A project should address an area of scientific or technological uncertainty and be innovative. The innovation needs to be an improvement in the overall knowledge in the relevant field of research, not just an advancement for the company. Qualifying projects could include those which:

  • increase the life of a battery
  • create a new type of material in an item of clothing
  • develop new spark plugs for use in an existing engine.

An important point to appreciate is that the activity does not have to create something completely new from scratch. It could include:

  • developing a product that exists but where there is some technological uncertainty which can be improved
  • making an improvement to a product or process eg exploring new cost effective materials which will allow a product to perform better.

Companies should document the uncertainties and planned innovation at the start of a project to provide evidence to support an R&D claim.

Relevant activities on R&D

Once the company is comfortable that R&D is taking place, then the next step is to identify the activities of the business that relate to the R&D activity.

There are essentially two types of activities:

  • those that contribute directly to achieving the advancement
  • certain activities that indirectly contribute to achieving the advancement.

Examples of direct activities are:

  • scientific or technological planning
  • scientific or technological design, testing, and analysis
  • activities which design or adapt software, materials or equipment.

Examples of indirect activities are:

  • information services eg preparation of R&D reports
  • indirect supporting services eg maintenance, security, clerical
  • ancillary services eg paying staff, leasing laboratories and equipment.
  • Indirect activities would all have to be undertaken for the R&D project.

Once the project begins to be involved in the production process, any R&D activities are treated as having stopped as development has finished. It is therefore beneficial for companies to keep a timeline of activities and their purposes to detail when the business starts to move into the production phase and therefore optimise their claims.

Types of expenditure

Qualifying expenditure which is incurred on activities which are either directly or indirectly related to the R&D project fall into different categories. These are as follows:

  • staffing costs
  • software
  • expenditure on consumable or transformable materials
  • costs of work done by subcontractors and externally provided workers
  • costs of clinical trial volunteers.

To be eligible, expenditure must be revenue in nature and paid by the time that the R&D claim is accepted. This means any accruals for expenditure have to be monitored carefully after the year end to make sure that they are paid and not written back to profit.

Further detail on some of these categories is provided below.

Staffing costs

The staff costs include employees and director staff costs ie salaries, employer pension contributions, employers’ NIC but not non-cash benefits-in-kind. Where an employee or director only spends part of their time on an R&D project then the costs are apportioned. The relevant staff are those involved in the directly and indirectly related activities highlighted above.

The indirect activity list included categories for ‘supporting’ and ‘ancillary’ services. The staff who perform these services should be providing supporting or ancillary services for the R&D project and not for the other people who are directly involved in the R&D project.

Examples

  • The salary costs of a maintenance worker working full time on maintaining laboratory equipment used for R&D can be claimed.
  • The salary costs of an accountant keeping a record of the maintenance work done including the laboratory maintenance cannot be claimed.

If directors are taking dividends from the company rather than salaries it may be more beneficial to change this for any directors involved in R&D.

Consumable transformable materials

Materials that are consumed or transformed in the R&D activity are eligible expenditure. Items included would have to be items which were consumed or transformed so that they were no longer usable in their original form. This would therefore include:

  • water
  • power
  • fuel
  • a chemical substance which is transformed
  • an electrical component.

For expenditure on or after 1 April 2015, any consumables or transformable materials that are included in a product that is sold, transferred or hired out will not be qualifying expenditure for R&D relief.

Costs of work subcontracted out and externally provided workers

Where the SME subcontracts qualifying R&D work to a subcontractor, the SME can claim a deduction for the cost of the subcontractor work. The amount that can be claimed depends on whether the SME is connected to the subcontractor but generally it is 65% of qualifying costs. Similar rules apply to externally provided workers.

Methods of claiming tax relief

Companies can claim R&D tax relief in the tax return for the period when the expenditure is charged in the accounts of the company. HMRC have specialist offices which are able to offer advice on R&D claims.

Further support for businesses

.A number of measures have been announced in the Autumn Budget 2017 to support business investment in R&D including:

  • a pilot for a new Advanced Clearance service for R&D expenditure credit claims to provide a pre-filing agreement for three years
  • a campaign to increase awareness of eligibility for R&D tax credits among SMEs
  • working with businesses that develop and use key emerging technologies to ensure that there are no barriers to them claiming R&D tax credits.

How we can help

There are a number of areas in this briefing where you may need specific advice depending on the circumstances of R&D activities and expenditure so please do not hesitate to contact us.

National Minimum Wage

Posted by Kath Docherty on October 16, 2017  /   Posted in Employers

The National Minimum Wage (NMW) and National Living Wage (NLW) are the legal minimum wage rates that must be paid to employees. Employers are liable to be penalised for not complying with the NMW and NLW rules. HMRC are the agency that ensures enforcement of the NMW and NLW.

We highlight below the main principles of the minimum wage regulations.

Please contact us for further specific advice.

What are the rates of the NMW and NLW?

There are different levels of NMW and NLW, depending on your age and whether you are an apprentice. The rates are given in the following table:

Rate from 1 April 2017 Rate from 1 April 2018
NLW for workers aged 25 and over £7.50 £7.83
the main rate for workers aged 21-24 £7.05 £7.38
the 18-20 rate £5.60 £5.90
the 16-17 rate for workers above school leaving age but under 18 £4.05 £4.20
the apprentice rate * £3.50 £3.70

*for apprentices under 19 or 19 or over and in the first year of their apprenticeship

There are no exemptions from paying the NMW on the grounds of the size of the business.

What is the National Living Wage?

The National Living Wage (NLW) is the single hourly rate for adults aged 25 years and above. The NLW rate is not connected to the rate used by the Living Wage Foundation.

Who does the apprentice rate apply to?

The apprentice rate applies to:

  • apprentices under 19
  • apprentices aged 19 and over, but in the first year of their apprenticeship.

If you are of compulsory school age you are not entitled to the NMW.

Fair piece rate

In addition, there is a fair piece rate which means that employers must pay their output workers the minimum wage for every hour they work based on an hourly rate derived from the time it takes a worker working at average speed to produce the work in question. The entitlement of workers paid under this system is uprated by 20%. This means that the number reached after dividing the NMW by the average hourly output rate must be multiplied by 1.2 in order to calculate the fair piece rate.

Key questions

Who does not have to be paid the National Minimum Wage?

  • The genuinely self-employed.
  • Child workers – anyone of compulsory school age (ie. until the last Friday in June of the school year they turn 16).
  • Company directors who do not have contracts of employment.
  • Some other trainees on government funded schemes or programmes supported by the European Social Fund.
  • Students doing work experience as part of a higher education course.
  • People living and working within the family, for example au pairs.
  • Friends and neighbours helping out under informal arrangements.
  • Members of the armed forces.
  • Certain government schemes at pre-apprenticeship level, such as:
    –  in England, Programme Led Apprenticeships
    –  in Scotland, Get Ready for Work or Skillseekers
    –  in Northern Ireland, Programme Led Apprenticeships or Training for Success
    –  in Wales, Skillbuild.
  • Government employment programmes.
  • European Community Leonardo da Vinci, Youth in Action, Erasmus and Comenius programmes.
  • Share fishermen.
  • Prisoners.
  • Volunteers and voluntary workers.
  • Religious and other communities.

Please note that HMRC have the power to serve an enforcement notice requiring the payment of at least the NMW, including arrears, to all family members working for a limited company.

What is taken into account in deciding whether the NMW has been paid?

The amounts to be compared with the NMW include basic pay, incentives, bonuses and performance related pay and also the value of any accommodation provided with the job.

Overtime, shift premiums, service charges, tips, gratuities, cover charges and regional allowances are not to be taken into account and benefits other than accommodation are also excluded.

What records are needed to demonstrate compliance?

There is no precise requirement but the records must be able to show that the rules have been complied with if either the HMRC or an Employment Tribunal requests this to be demonstrated. Where levels of pay are significantly above the level of the NMW, special records are not likely to be necessary.

It is recommended that the relevant records are kept for at least six years.

Normally there is not likely to be any serious difficulty in demonstrating compliance where employees are paid at hourly, weekly, monthly or annual rates but there may be difficulties where workers are paid on piece-rates and where, for example, they work as home-workers.

Where piece rates are used, employers must give each worker a written notice containing specified information before the start of the relevant pay period. This includes confirmation of the ‘mean’ hourly output and pay rates for doing their job.

What rights do workers have?

Workers are allowed to see their own pay records and can complain to an Employment Tribunal if not able to do so.

They can also complain to HMRC or to a Tribunal if they have not been paid the NMW. They can call the confidential helpline: 0800 917 2368.

What are the penalties for non-compliance?

From 1 April 2016, the government increased the penalties imposed on employers that underpay their workers in breach of the minimum wage legislation from 100% to 200% of arrears owed to workers. The maximum penalty is £20,000 per worker.

The penalty is reduced by 50% if the unpaid wages and the penalty are paid within 14 days.

Periodically the government publishes a list of employers who have not complied. The reasons employers fail to comply vary and include topping up pay with tips and deducting sums for uniforms, among others.

How we can help

We will be more than happy to provide you with assistance or any additional information required. We also offer a full payroll service – please contact us if you would like more information.

Agency Workers Regulations

Posted by Kath Docherty on October 16, 2017  /   Posted in Employers, Policies and Regulations

Regulations which took effect from 1 October 2011 mean that workers supplied to a company, or to any other entity, by an agency will become entitled to receive pay and basic working conditions equivalent to any directly employed employees after a 12 week qualifying period.

Read More

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