HR · 6 June 2018

Couldan EMI share option scheme help you incentivise and retain employees?

EMI share option scheme
The EMI share option scheme is approved by HMRC
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.

Eligibility

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).

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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.


 
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ABOUT THE EXPERT

Karen Holden is an award-winning solicitor and founder of A City Law Firm (ACLF), the go-to lawyers for entrepreneurs, startups, scale-ups, those seeking investment. In addition to being very successful lawyers for businesses , ICOs and family law, ACLF are now the UK's leading LGBT law firm and surrogacy specialists. Karen is a regular media commentator, panellist and event speaker.

Tax & admin