If you operate a small or medium-sized entrepreneurial company struggling to compete on salary to attract the best employees, the Enterprise Management Incentive (EMI) could be beneficial.

An EMI scheme enables companies to offer shares to selected employees in the future at a set price.  It is advantageous to businesses that want to reward, motivate and retain key employees with a tax-efficient incentive.

Which businesses qualify?

  • Have gross assets of less than £30m at the date of grant
  • Have a maximum of 250 FTE employees
  • Not be a subsidiary of, or be controlled by another company
  • Unexercised options cannot exceed £3m (valued at the date of grant)
  • Carry out qualifying trades (excluding some like legal/accountancy services, property development, hotels and residential care homes), wholly or mainly in the UK. Research and Development count as a trade.
  • Not be considered an ‘enterprise in difficulty’ for the purposes of the European Commission’s Rescue and Restructuring Guidelines. 

Which investors qualify?

  • Employees of the company or group who work 25 hours per week or 75% of their working time (including self-employment) for the company, whichever is lower.
  • When combined with associates (such as a spouse), must not hold more than 30% of the ordinary share capital of the company or any group company.

What is a qualifying investment?

Up to £250k (£120k pre-16th June 2012) in a qualifying company by a qualifying investor.

What are the tax advantages?

  • There is no income tax or National Insurance charge at grant or exercise of EMI, so long as the option price is not less than the market value of the shares at the date of grant. Tax and possibly NI are due on the difference between the price paid and market value on exercise if it’s an EMI or approved scheme. Any increase in value is taxed as a capital gain upon disposal of shares.
  • The company can claim corporation tax relief on the difference between the price paid and the market value at exercise.

EMI for employee motivation

  • Without giving out shares at the outset, offering options increases the value of the company without diluting equity, votes and dividends.
  • Options can be conditional on personal achievements or departmental or company-wide performance targets.
  • Options can lapse if the employee leaves, with no need to buy back shares, as long as options have not yet been exercised.
  • EMI options can be granted selectively, with different amounts granted to different people.
  • Options tend to be exercised on the sale of the company so there is no cash outlay for the shares by the employee (since this is exceeded by the proceeds).

For more information on the Enterprise Management Incentive and how it could work for your business, get the best advice from CRM. Call the experts on 01865 379272.

Sage Accountant Partner Logoiris kashflowFreeagent