There are always challenges in business. How do you hire or keep the best talent? How can you invest in top-class training and then make sure your newly skilled employees don’t walk straight out the door to other companies?
One recent report* shows that companies with employee ownership options were 3.63 times more likely to retain non-managerial staff and 3.95 times more likely to retain managers than traditionally held companies. Other studies have shown that employee participation in the ownership of a company can contribute to a much greater than average growth of a business, because of the employee involvement in the company.
It’s a way of rewarding employees in addition to their salary, and other than the initial setup and running of the scheme; there is usually no cost to the employer. So that’s good. There are many types of schemes, ‘Revenue approved’ or ‘Revenue unapproved’ so it’s always best to have a chat with your financial advisers
about which is the right one for your company. Here’s a simple checklist of the types of schemes:-
For the employee that gets shares in an employer company, he or she is liable to income tax, PRSI and USC on the value of the shares received like any other benefit arising as part of their employment. Depending on the scheme, the tax is collected through the operation of payroll deductions by the employer although there may be no Employers PRSI to be paid on the benefit. The tax, PRSI and USC due could be up to 52% of the value and a formal valuation should be carried out. The schemes above do not need Revenue approval. However, there is a Revenue reporting obligation for the employer.
Then there are the ‘Revenue approved’ schemes of which there are four:-
For employees, the value of the shares received may be exempt from income tax (T&Cs apply, of course!) however again, for the employee USC & PRSI is payable on the value of the shares as well as CGT 33% on any future sale.
One scheme business owners are opting more and more for is the ‘Restricted Share’ scheme. This is an ‘unapproved’ but tax efficient scheme for shares acquired by employees with a period of restriction imposed on their sale. Because of this restriction the value of the shares is reduced for the purposes of tax assessment.
However, if restrictions are subsequently lifted, say on a sale of the shares, the tax has to be recalculated at that time. The shares must be held in trust (organised by employer) for a specified time (minimum of one year), and there are other restrictions during this time, including around the assigning,
transferring, pledging and selling of the shares.
In broad terms, the market value of shares issued in a company is derived from the value of the business and assets owned by the company. Usually, there’s no ‘ready market’ for these shares so they have to be valued formally by an accountant. That valuation looks at the company’s profits, the value of similar companies and any historic share transactions within the company. Value discounts are applied for issues such as the size of the shareholding (lack of
control etc.) as well as the lack of lack of marketability of the shares (not easily sold, if required). In the case of Restricted Shares, the value of shares reached using the above parameters is reduced further to recognise the period of restriction. This could be up to 60% if the restriction is in place for five years.
A further requirement is that employers with these kinds of schemes have to complete an “Employer’s Share Awards” return by 31st of March following the end of the relevant tax year, that includes details of share awards made and disposals. Employees within such schemes are also required to file a return.
These schemes my look on paper to be complicated, but in reality, once established, are very easy to operate. Once in place they are unquestionably an excellent way of attracting the right staff that will identify the potential in your business and help you both achieve it.
For further information, please contact your financial advisor, or Deborah Drought, Director, Taxation Services, JPA Brenson Lawlor Ltd. Email firstname.lastname@example.org.
* ESOP companies outperform other firms during Covid-19 pandemic – The Menke Group
This Business Support article featured in the November/December issue of The Hardware Journal.