If you’re a business owner or manager in the UK, you may have heard of unapproved share option schemes but what exactly are they, how do they relate to approved option schemes, such as EMI schemes, and how can they benefit your company and employees and other team members?
Here we explain what they are, how they work, and why they can be a valuable tool for employee participation and retention.
What is an Unapproved Share Option Scheme?
Unlike approved share option schemes, such as the Enterprise Management Incentives (EMI Schemes) which have specific tax advantages and must be approved by HM Revenue and Customs (HMRC), unapproved share option schemes do not have these tax benefits and do not require approval from HMRC, which is why they are described as “unapproved”.
An unapproved share option scheme allows a company to grant its employees and other team members the right to purchase shares in the company at a future date. This is often used as a way to incentivise and reward employees and team members for their contributions to the company’s success. Unlike under an EMI Scheme, (Enterprise Management Incentives) it is not necessary to be an employee to qualify.
How Does an Unapproved Share Option Scheme Work?
An unapproved share option scheme typically works in the following way:
- The company grants the recipient the right to purchase a certain number of shares in the company at a predetermined price, known as the exercise price.
- The recipient is not required to purchase the shares immediately, but rather has the option to do so at a future date, known as the exercise date.
- If the recipient chooses to exercise their option and purchase the shares, they will pay the exercise price and become a shareholder in the company.
- If the recipient chooses not to exercise their option, the option will expire on the exercise date and they will not become a shareholder.
The exercise price is typically set at the current market value of the shares at the time the option is granted. This means that if the company’s share price increases between the grant date and the exercise date, the recipient can purchase the shares at a lower price and potentially make a profit.
Why Use an Unapproved Share Option Scheme?
There are several reasons why a company may choose to implement an unapproved share option scheme.
Participation and Retention
One of the main benefits of an unapproved share option scheme is that it can be used as a tool to incentivise and retain employees or team members. By offering recipients the opportunity to become shareholders in the company, they are more likely to feel invested in the company’s success and be motivated to contribute to its growth.
Additionally, by granting options that have a future exercise date, the company can encourage recipients to stay with the company for a longer period of time in order to reap the potential benefits of the options.
Flexibility and Customisation
Unlike approved share option schemes, which have strict rules and regulations set by HMRC, unapproved share option schemes offer more flexibility and customisation options for companies. This allows companies to offer options to team members who are not employees or to employees who do not qualify for EMI Schemes and to tailor the scheme to fit their specific needs and goals.
No Need for HMRC Approval
As mentioned earlier, unapproved share option schemes do not require approval from HMRC. This means that companies can implement the scheme without having to go through a lengthy approval process, saving time and resources.
How to Set Up an Unapproved Share Option Scheme
If you’re interested in setting up an unapproved share option scheme for your company, there are a few steps you’ll need to take. Before implementing any type share scheme, it’s important to consult with a professional, such as a tax advisor or specialise solicitor, to ensure that you understand the legal and tax implications of the scheme. If you would like to discuss your options please book a free introductory call with a specialist solicitor from JPP Law.
Create a Plan
Next, you’ll need to create a plan for your unapproved share option scheme. This should include details such as:
- The number of options to be granted
- The exercise price
- The exercise date
- Any eligibility criteria for recipients
- The vesting period (if applicable)
- Any performance conditions (if applicable)
Communicate with your Team
Once you have a plan in place, it’s important to communicate the details of the scheme with your employees and other potential recipients. This will help them understand the potential benefits and encourage them to participate.
It’s important to keep accurate records of all share options granted and exercised, as well as any changes made to the scheme. This will help ensure compliance with any legal or tax requirements.
Potential Risks and Considerations
While unapproved share option schemes can be a valuable tool for participation and retention, there are some potential risks and considerations to keep in mind.
Unlike approved share option schemes, unapproved schemes do not have any specific tax advantages. This means that employees may be subject to income tax and national insurance contributions on the difference between the exercise price and the market value of the shares at the time of exercise.
Legal and Regulatory Compliance
As with any employee share scheme, it’s important to ensure compliance with all legal and regulatory requirements. This includes consulting with a professional and keeping accurate records.
Real-World Examples of Unapproved Share Option Schemes
Many companies in the UK have successfully implemented unapproved share option schemes for their employees. One example is Deliveroo, a food delivery company, which granted share options to its employees in 2018 as part of a £5 million reward scheme. Another example is Revolut, a fintech company, which granted share options to its employees in 2019 as part of a £33 million reward scheme.
Unapproved share option schemes can be a valuable tool for companies looking to incentivise and retain employees and as an alternative to EMI Schemes if the company or its employees or other team members do not meet the required EMI qualifying conditions. By offering recipients the opportunity to become shareholders in the company, companies can increase participation and motivation, while also providing potential financial benefits.
EMI Schemes – Free Initial Legal Consultation
What are EMI Share Schemes and how do they work?
Enterprise Management Incentive (EMI) Share Schemes: Major Changes for 2023
EMI Eligibility and the EMI Qualifying Conditions
The Employee Share Scheme and EMI Scheme Rules