Supporting growth: the role of employee share incentives

In the seventh article of our series, Tax in 2024 for the Future Energy Sector, the TLT Tax team looks at how employee share incentive plans can be used to support the growth of renewables businesses and mitigate the “green skills gap”.

Why should businesses in the future energy sector consider employee share incentives?

Due to the fast growth of the future energy sector, businesses in this sector can benefit from proactively offering employees participation in a share incentive plan.

Previous analysis by PWC has estimated that whilst 400,000 new jobs are needed to achieve net zero by 2030 in the UK, a “green energy skills gap” will create a shortage of around 200,000 workers to fill these roles. It is therefore vital that businesses in the renewable energy and low-carbon sectors seek to attract and retain employees with the right talents, given the increasingly fierce competition for these specialist skills.

Share incentives play an important role in attracting key talent, and increasingly, key hires in the UK have an expectation that some form of equity incentive will be available to them.  Offering share incentives can help employers minimise the upfront fixed cost of new hires and those incentives can act as a successful retention and motivation tool for employees, having the potential to deliver significant reward.

Choosing the right form of share incentive is fundamental to ensure not only that the incentive has the intended motivational impact from an employee perspective, but that it can be easily implemented and operated by the business.

Do share incentives have to be offered to all employees?

No.  It is common for the board of a company to wish to select which employees should participate in a share incentive plan and most share incentive plans (with a couple of exceptions) can be made available on a “discretionary” basis.

How are incentives for renewables companies typically structured?

Share options, whereby an employee is granted a right to buy shares in the company in the future at a price fixed at the date of grant, are a popular choice of incentive for a large proportion of fast growth companies.

Granting options to employees has a number of advantages over an outright award of shares, including:

• options are risk-free – there is no upfront funding obligation and employees aren’t obliged to exercise the right to buy the shares in future;

• no upfront acquisition of shares means that companies can avoid the complexities involved with employees becoming minority shareholders;

• it may be possible for the grant of options to be structured tax efficiently, so that the growth in value of the shares in the period from grant to exercise is taxed as capital, not income;

• the company can determine when the right to exercise the options is triggered, for example, on specified vesting dates, on satisfying set performance conditions or when the company is sold.

How can discretionary share options be structured tax efficiently?

Tax efficient discretionary share options can be granted as either:

• Enterprise Management Incentive (EMI) options, which provide for the grant of options over shares with a value of up to £250,000; or

• Company Share Option Plan (CSOP) options, which provide for the grant of options over shares with a value of up to £60,000.

Both EMI and CSOP plans are statutory tax-advantaged plans and both can be operated on a discretionary basis.

These plans confer particular tax reliefs on employees and employers so that, as long as certain statutory conditions are satisfied, employees are only subject to tax (capital gains) when they sell the shares acquired on exercise of the options.  In addition, the employer will not be liable to national insurance contributions on exercise of the options and may receive relief from corporation tax as a result of the arrangement.

Are EMI and CSOP plans available to all companies?

As mentioned above, there are a number of statutory conditions that have to be satisfied before a company can grant options under an EMI or CSOP plan and therefore advice on eligibility should always be taken.

A particular hurdle for companies in the renewable energy sector wishing to establish an EMI plan can be the trading condition in the EMI legislation which requires that the company does not carry out any excluded activity, including property development.

Are there tax efficient alternatives to share options?

Yes.  For renewable energy companies where EMI or CSOP options are not suitable, and there is existing value in the business, growth share arrangements can be utilised to achieve tax efficiency. 

Implementation of a growth share arrangement involves amending the company’s articles to create a separate class of ordinary shares (growth shares) to those held by current shareholders. 

The key feature of growth shares is that they only accrue capital/economic value above a specified hurdle, which is a figure agreed before the growth shares are issued, at a premium to the current market value of the company.  Since the growth shares only have a right to growth above the hurdle, their value on acquisition by the employees should be relatively low.

Vesting provisions can apply to growth shares and so the arrangements can be structured to mirror the commercial objectives of a share option.

Any return on a sale of the growth shares would, in normal circumstances, be taxed as capital, not income.

TLT comment

There are numerous benefits that a considered and carefully structured share incentive plan can offer to companies in the renewables sector.  At TLT, we have a wealth of experience advising renewable energy and fast growth companies on the successful implementation of the full range of share incentives.  Our Incentives Team can support you to deliver the right incentives to your employees. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.