Aberdeen and Grampian Chamber of Commerce’s 31st Oil and Gas Survey painted a positive picture for the oil and gas sector.
Of course, that growing optimism has a knock-on effect when it comes to recruitment.
The survey — conducted in partnership with the Fraser of Allander Institute and KPMG UK — says over the past year respondents report recruitment problems beginning to re-emerge with organisations experiencing both escalating skills shortages and increased competition for talent.
Which brings us to the question of how, in an improving industry landscape, can businesses attract, retain and inspire the best people?
One option to consider is an enterprise management incentive (EMI) scheme.
EMI — the basics
Popular in particular with high growth companies, including technology-focused oil and gas supply chain businesses, EMI schemes allow employers to issue share options: the right to later buy shares in a company at a price that’s fixed now.
These schemes are often seen as a useful means to motivate and reward staff for investing time and skills in helping grow a business by giving them a stake in that success.
There are exceptions and qualifying criteria that must be met, but generally share options of up to £250,000 can currently be granted to each employee, up to a total value of £3million of option shares.
When the option shares are sold, provided the employer and employee still meet the EMI-qualifying criteria and assuming the shares aren’t found to have been issued under market value on the option grant date, no income tax should be payable on the increase in value on top of the amount to be paid by the employee for their shares.
Any increase in value will still attract capital gains tax, but currently this will be payable at a reduced rate of 10% on the amount of the gain, provided the employee has held the options for at least 24 months.
When compared to payment of a cash bonus, EMI options enjoy favourable tax treatment: cash bonuses will be taxed in the usual manner.
However, employees may pay no income tax or national insurance at all, either when an option is issued or exercised, if care is taken when putting the scheme in place and during the option period. Ultimately, they may end up paying only a reduced rate of capital gains tax when they sell the shares.
The cost of setting up and running the scheme, as well as the gain on the shares between the grant and date of exercise may be tax-deductible for corporation tax purposes.
And of course, shares don’t need to be offered to all employees. With the EMI scheme, you can be selective who’s included, you can also stipulate they are ‘non-voting’ shares and, in a lot of cases, schemes are structured so that share options are only exercised when a company’s going to be sold.
How to set up a scheme
Here’s where it’s important to seek professional advice, not least so both you and your employees can see the most financial benefit.
There are criteria for both the employee and employer to meet during the option period to qualify for favourable tax treatment, so it’s important to establish if your business qualifies. While it’s not a requirement, it is also advisable to agree the proposed share valuation, at the date of grant, with HMRC.
Other legal support includes drafting shareholders’ agreements and option contracts, reviewing the business’s constitution and making filings at Companies House.
There’s a lot to consider before going down this route; however, with the AGCC survey citing employment costs and recruitment challenges as one of the top concerns for respondents over the next 10 years, it’s an approach that may well become increasingly common.
Rod Hutchison, partner, Ledingham Chalmers