If you operate a small or medium sized entrepreneurial company struggling to compete on salary to attract the best employees, an 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.
EMI for employee motivation
There are many ways that an EMI scheme can help to motivate employees. Offering share options involves key employees in building the value of the company without diluting equity, votes and dividends upfront. Options can be conditional on personal achievements and/or departmental or company-wide performance targets. If the employee leaves the company, options can lapse with no need to buy back shares, as long as options have not yet been exercised. Even where options have been exercised, shares may be subject to forfeiture at restricted prices under so called ‘good/bad lever clauses’ if agreements are carefully drafted.
EMI schemes provide great flexibility to companies as they can fit around commercial objectives and 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). It becomes effectively a tax efficient bonus for staying with the company until the owners exit.
Benefits for employers
There are significant tax benefits for companies, such as:
- No income tax cost (under some conditions)
- No National Insurance Contributions for the grant or on exercise of the option (under certain conditions)
- Corporation tax relief on the difference between the market value of shares when acquired and the option price paid, potentially saving a considerable sum for the company.
Benefits for employees
The tax benefits for employees result in:
- Lower tax costs than other cash or non-EMI rewards
- No National Insurance Contributions or income tax for the grant or on exercise of the option (under certain conditions)
- Capital Gains Tax (CGT) is paid on the growth in value of the shares, but from the date of the EMI option grant, most EMIs will receive Business Asset Disposal Relief resulting in a tax charge of a maximum of 10% (rather than 20% CGT) after holding the options for a 24 month holding period. Unlike where shares are held directly, smaller minority holdings of less than 5% of options over shares potentially qualify for the 10% Business Asset Disposal Relief for CGT too.
Which businesses qualify?
To run an EMI scheme, a business must:
- 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 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 counts as a trade
- Have a UK permanent establishment or have a qualifying group company which has a UK permanent establishment.
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
- The maximum value of shares under option must not exceed £250,000 per employee.
For more information on Enterprise Management Incentive schemes and how they could work for your business, get the best advice from CRM. Call the experts on 01865 379272.