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Enterprise Management Incentives / EMI – a formidable weapon in the SME arsenal in the war for talent.

Author

Sharon Collier

An experienced Chartered Tax Adviser and Trust and Estate Practitioner, Sharon joined ETC Tax in September 2016.

Enterprise Management Incentives / EMI – a formidable weapon in the SME arsenal in the war for talent

In the first of a series of articles looking at various types of share incentives we are going to consider Enterprise Management Incentives (“EMI”).

At first glance, the use of share incentives as part of a remuneration package might appear to be the preserve of large (most likely listed) companies.  Whilst this might be true for some forms of share arrangements, EMI is aimed squarely at SME’s with favourable tax treatment for both employer and employees.  SME’s can be at a disadvantage to their larger competitors when it comes to recruitment and retention of talent.  The irony is that these are also the companies where getting the right people in to the right jobs – and keeping them there – can be vital to the success of the company.

EMI encourages smaller businesses to offer share ownership to key employees and directors via an option arrangement.  EMI was introduced as a Tax Advantaged Employee Share Scheme in 2000 to assist growing companies to attract and retain key employees and reward them for their contribution to the success of the company.  In most cases the companies would not have the cash available to provide the remuneration packages required to attract and retain the calibre of employees they need.  EMI is by far the most tax beneficial type of share arrangement for employees.

Overview

A share option gives someone the right to purchase shares at some point in the future at a price which is fixed now.  They are very useful to incentivise and retain key employees because if the shares grow in value the employees could make significant gains when they sell their shares, and pay much less tax than would be payable on other forms of remuneration or incentives.

EMI options can be granted by independent trading companies with gross assets not exceeding £30 million.

Options over shares with an unrestricted market value (UMV) at the date of grant of up to £250,000 per employee can be granted. The £250,000 limit applies from 16 June 2012; prior to that date, the individual limit was £120,000. There will generally be no income tax or NICs when the options are granted or exercised.  A qualifying company can grant EMI options up to an overall limit of £3m.

There is no approval process or clearance mechanism for EMI, but a requirement for companies to notify HMRC within 92 days of an EMI option being granted.   There is also an annual reporting requirement.

The Tax Benefits

The Employee

Grant of Options – No income tax or National Insurance on the grant of a qualifying EMI option.

Exercise of Options– Provided it is within ten years of the date of grant, there has been no disqualifying event, and there was no discount at grant, there will be no income tax or National Insurance on exercise.

Sale of Shares – Capital gains tax will be payable on a disposal of the shares.  Entrepreneurs Relief can be available in many cases to mean that tax is charged at just 10%.

The Company

When an option is exercised the company obtains a corporation tax deduction for the EMI “Profit” i.e. the difference between the market value of the shares at the time the option is exercised, and the total amount paid in respect of the grant or exercise of the option.

Practical Considerations

Valuation

A valuation will be agreed with HMRC for the shares prior to grant.

Having experience advisors to negotiate with HMRC will ensure that the optimal value is agreed.  A significant minority discount for smaller numbers of shares can be agreed.

Flexibility – scheme design

The key to ensuring that the EMI scheme you implement delivers maximum benefit to the company is in the scheme design.  The scheme has huge flexibility in relation to the conditions that can be placed on exercise and sale.  For example :

  • When and how many options can be exercised can be linked to attainment of performance targets – individual, corporate, both, part discretionary?
  • Exercise on a certain event/events
  • Exercise at specific dates, or within specific windows, but subject to attainment of pre-agreed targets

There are very few limitations, so the scheme can be implemented to support the specific requirements of your business.

Qualifying Conditions

There are a number of conditions in relation to the company and the employee which must be met for the option to be qualifying.  These are beyond the scope of this article, but more details can be found in the ETC EMI practice note – emi-practice-note

EMI can be a very powerful tool both for start-ups and for other SMEs who are looking to enhance shareholder value, possibly in advance of an exit event.  They can be used in a very tailored and flexible way to achieve the specific objectives of each company.

If you are

  • a company who would like to have a no obligation discussion as to how EMI could help your business; or
  • an accountant or other business advisor who has clients who might benefit from introducing an EMI or other share incentive scheme

please contact Sharon Collier from Enterprise Tax Centre either on 01565 759820 or by email to sharon@etctax.co.uk

 

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