On 17 September 2015 HMRC published on its website a research report on employment related securities. The research report is the product of a series of hour-long in-depth interviews with advisers, employee benefit consultants and employers.

Generally an employment related share is a share that is given to an employee as part of a remuneration package. This provides a way of allowing the employee to participate in the growth of the employer company, thereby creating an incentive for the employee to contribute to that growth. The research done for HMRC focused on special classes of shares known as growth shares that allow the employee to participate more in the capital growth of the company than an external investor would be able to do.

Growth shares in this context are a special class of shares that are allotted to employees to allow them to access potential rewards if the company experiences capital growth. The tax legislation allows the employees to invest in the employer company in a tax efficient way, for example by granting capital gains treatment rather than income tax treatment.

The types of employer that are interested in offering such shares to their employees are firms with ambitious growth plans that have clear exit strategies in the short to medium term (three to ten years). Advisers consider that growth shares are most appropriate in the case of high technology, communications and media firms. For the employees the benefits are the chance to increase their income in proportion to the effort, skill and time they devote to the business, as well as the favorable tax treatment. The disadvantage for employees is that tax and national insurance contributions are paid up-front.

Employers consider that these share schemes allow them to attract the most suitable employees and to incentivize them, encouraging behavior that results in high growth. There can be a tax advantage because no national insurance contributions are payable by the employer in relation to the shares. However the employers responding to the survey mentioned that there is also no corporation tax deduction for the employer.

According to the advisers surveyed the issue of growth shares to employees is generally quite expensive for employers as they need to change their Articles of Association and the shares must be valued when they are issued. Explaining a share scheme to the employees also required time. In practice only a small proportion of proposed share schemes are actually implemented.

The advisers were most familiar with a category of growth shares known as ratcheted growth shares. Under these arrangements the value of the employee’s shareholding increased as specified growth targets are met. This gradual ratcheting up of the shareholding means that there is some financial benefit to employees even if the final growth targets are not met.

Advisers also mentioned Enterprise Management Incentives (EMIs). Under these tax-favorable schemes the employer grants an option that employees may choose to take and there is no cost up front to employer or employee. They are not expensive to implement and the employer obtains a corporation tax deduction. When an employee leaves the company the EMI option lapses rather than requiring any clawback. However there is a size limit on firms that can operate EMIs.

The research indicated that growth shares have an important role to play in the growth of businesses. The advisers considered that in a growing economy both employers and employees would show increasing interest in the use of growth shares. The advisers expect growth shares to continue to be important to larger SMEs and for private equity backed businesses, neither of which qualify for EMIs.

Advisers considered that there would be an increasing trend among employers to favor risk-taking by employees and investment by employees in the business. There could be a trend towards longer time periods over which the growth payout is made. There may also be more emphasis on individual employee performance conditions rather than company growth objectives when implementing the share schemes.