Writing for Business Advice, A City Law Firm founder Karen Holden explains how an EMI share option scheme could help employers incentivise and retain employees.
The tough question business owners face, especially tech companies, is how to retain and incentivise employees and can this be done cost effectively without large bonus payments?
The Enterprise Management Incentive (EMI) scheme is a potential means of doing this – allowing you to make employees shareholders and part of the business and its future, without it actually costing the company. This is a clever means of having employees invest time in the overall growth and success of the business by offering them a long-term share in the profits.
Here, I outline how EMI could work, the advantages it could offer to employees and the positive effect of the recent approval from the EU to prolong the running of the scheme.
What is EMI?
EMI is an employee share option scheme, approved by HMRC. It allows employers to grant share options in that business (worth up to £250,000) to employees as a reward for their efforts within the business. It was introduced by the Finance Act 2000.
Although conditions apply as to which employers and employees are eligible, it is highly advantageous from a tax perspective. Recent changes have made it even more beneficial.
There are several conditions that must be met by a company wishing to operate an EMI scheme, these include that:
- The total value of the company’s gross assets must not exceed £30m
- The company must have a permanent establishment in the UK
- The company must be a trading company (i.e. not an investment company)
- The company must not be a subsidiary of or controlled by another company, however, parent companies can qualify for EMI
- There must be fewer than 250 employees at the date the EMI options are granted
There are also several requirements for employees to qualify as participants in an EMI scheme, which include that:
- The individual must be an employee of the issuing company, or an employee of a subsidiary (directors included)
- Employees are required to spend at least 25 hours per week or, at least 75% of their working time, as an employee of the company
- The employee must not hold more than 30% of the shares of the company
How does the tax work?
An EMI scheme is thought to be the most beneficial tax structure for employees of a company. The general rule is that if an employer grants an employee shares, employees will be charged on the market value of the shares or options through income tax and National Insurance contributions (NICs) will apply.
However, under an EMI approved scheme, no income tax or NICs will apply, provided that the exercise price is set at the same or a higher price than the agreed market value of shares on the date that the option is granted, and the date of exercise is no more than ten years after the option grant date.
The only costs that employees will need to be aware of are set up costs and the requirement to pay capital gains tax (CGT) when the shares are eventually sold, which will only be 10% over the exercise price (the increase in value over what they pay for the shares).
How else do employees benefit?
Another benefit is thought to be that if the value of the company increases over time, the employee could make a significant profit when they sell their shares, which make options very useful for companies that want to incentivise key employees.
This is an attractive concept for employees as they are offered the chance to benefit from the company’s growth, by having a tangible interest in the company’s ownership alongside other stakeholders and owners.
It can also help employees feel more aligned with the interests of the company as all stakeholders will be motivated in working towards increasing shareholder value.
Granting an EMI share option scheme
To set up an EMI scheme you should:
- Check that the company is eligible to grant EMI options
- Agree a share valuation with HMRC
- Put in place a robust option agreement. You should consider how and when employees may lose their entitlement to the option
- Notify HMRC within 92 days of grant
- Submit annual returns to HMRC
- If shares are to be acquired at a discount to market value on the date of grant, a written joint election may be needed no later than 14 days after exercise
April 2018 onwards: Can these schemes still be offered?
Whilst EU State Aid approval for the EMI scheme expired on 6 April 2018, the European Commission announced, on 15 May 2018, that the prolongation of the scheme has now been approved. The Commission’s assessment found that the approval of this scheme is a necessary measure to help UK small and medium-sized enterprises attract talented and skilled personnel.
The Commission also found that the scheme contains a number of safeguards, such as a cap on the value of share options that can be subject to the tax advantage both at employee and employer level, thus ensuring that potential distortions to competition are limited. As a result, the Commission concluded that the measure is in line with EU State Aid rules.
The Commission’s new approval does not expire until 6 April 2023, however this will of course be subject to the terms of the Brexit withdrawal agreement in due course.
There is still a degree of uncertainty in respect of EMI share options granted between the period 6 April 2018 and 15 May 2018. In HMRC’s announcement on 4 April 2018, concerning the expiry of the earlier approval, it was suggested that the granting of EMI share options during this “interim period” may not be eligible for the tax advantages afforded to option holders.
HMRC has yet to issue a statement and businesses are therefore advised to exercise caution in granting new EMI share options until the HMRC confirms the position.
Karen Holden is an award-winning solicitor and founder of A City Law Firm
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