Craft-ing the Equity Future of your Company

Mon 08 Feb 2016

April 2016 sees the arrival of the first annual London Games Festival (launch video here) – a 10 day extravaganza of events and talks. The festival is part of the Games London initiative which represents a £1.2 million investment from the London Enterprise Panel (LEP) demonstrating the drive to make London the capital of the games world, and continue to increase the UK’s presence in the market.

The global market for video games (incorporating physical copy, download and mobile gaming) was valued at US$83.6 billion in 2014 and this was estimated to grow to $113.3 billion by 2018 (based on a review by newzoo.com). The new Video Games Development tax break for the UK industry which was introduced on 1 April 2014 has been a welcome boost and a necessary one to allow the UK market to grow. It should encourage companies to headquarter in the UK and should also lessen the risk of a highly talented and creative workforce (in excess of 9,000 employed throughout the UK) relocating to the US, France and Canada amongst others.

Attracting and retaining key talent is key

Staff retention mechanisms will be required too – so, what are the options available from a share schemes perspective for gaming companies to retain, attract and incentivise staff?

An equity plan, which is effectively communicated to employees and aligns to the commercial targets of the company, can act as a strong incentive for staff recruitment and retention. Such arrangements are also helpful in demonstrating to investors that the business has locked-in key employees and aligned their reward with shareholder value. The adoption of a tax-advantaged plan can provide tax efficient remuneration to employees whilst also providing potential tax breaks to the employer.

The UK really is ahead of the game when it comes to share options in this sector

The UK really is ahead of the game, with Enterprise Management Incentives (EMIs) available as a popular employee share option choice in the tech sector. Such plans are both flexible and very tax efficient, and help attract and retain skilled developers and senior management. The scheme is structured in the form of an option – a right to acquire shares in the company in the future – where the exercise price is fixed at the date of grant. A future liquidity event allows the employees holding such options to benefit financially through income tax relief and the possibility of a much lower capital gains tax rate (of just 10%), should relevant conditions be met. Companies should ensure that they receive expert advice in relation to the implementation of such schemes and the agreement with HMRC of a share valuation, to ensure the conditions are met to avail of the tax efficiencies.

EMI can be established not just by UK companies but can also operate as a sub-plan for UK staff where the equity issuing entity is an overseas parent company.

Our EMI factsheet can be downloaded for free here.

What about contractors, NEDs and overseas staff?

The eligibility conditions for EMI mean that contractors and NEDs cannot participate in the plan. Instead, a non-tax advantaged Share Option Plan (SOP) could be considered as a flexible method of providing equity award to non-employees (and overseas employees if applicable) which can preserve cash-flow where the equity awards are combined with a lower daily pay. Alternatively, a nil-paid or partly-paid restricted share plan could provide a more tax-efficient solution for this demographic.

When offering equity awards to non-UK based staff and employees who are internationally mobile, it is important to also consider any local jurisdiction tax, social security and regulatory matters. Our share scheme experts work very closely with our Global Mobility team and overseas colleagues to ensure such matters are taken care of.

How we can help

Gaming companies in the UK seeking to promote themselves as employers of choice in an increasingly competitive and global digital talent marketplace should think creatively about what is going to attract their skilled workforce. Flexible employee benefits and well designed share plans are solutions that form part of that toolkit.

To find out more about how our share incentives and employer solutions teams can help you contact:

Liz Hunter – Director, Share Schemes and Employer Solutions: liz.hunter@mazars.co.uk

Should you have any queries in relation to Video Games Tax relief, R&D tax credits or other matters regarding your entrepreneurial games company business please contact:

Melanie Orriss – Partner, Entrepreneurial Business and Private Clients Melanie.Orriss@mazars.co.uk