Tax Insight: Enterprise Management Incentive (EMI)

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More than just a reward for loyalty.

A share in the company’s future.

Any good employer wants to attract, retain and motivate the best staff – and what better way to do that than by making them equity holders in the success of the company itself?

An Enterprise Management Incentive (EMI) offers a way to go beyond standard packages and bonus schemes, by offering selected staff a stake in the future performance of the business. An EMI is an HMRC approved options scheme – and is recognised as the most tax-efficient way to do this.

At PKF, we can help you enjoy the fruits of this scheme, by offering expert tax advice and support to help get your EMI started – and working closely with lawyers to ensure a seamless service that helps you run it smoothly.

Does your business qualify?

To qualify for an EMI the shares under option must be in an independent trading company or the holding company of a trading group. In either case, the gross assets must be £30 million or less.

The maximum number of employees is 250 (or full- and/or part-time employees up to the equivalent of 250 full-time staff).

Some trades are excluded: for example financial services, property development, insurance and accountancy. However, insurance brokers – as opposed to insurance companies – do qualify, and we have obtained HRMC confirmation on several occasions that this is allowed under the legislation.

The company’s or group’s trade need not be carried on wholly in the UK, provided the company has a permanent establishment in the UK. This means it’s now possible for a non-UK company with either a branch or a subsidiary in the UK to set up an EMI.

If there is any doubt about whether a company qualifies, HMRC is willing to give advance clearance.

Which employees qualify?

There are no restrictions on the number of employees who can be granted options.

However, people granted shares must be employed by the company whose shares are subject to the option, or by one of that company’s subsidiaries.

They must spend at least 25 hours a week (or at least 75% of their time) working for the company or group. In addition to this they must not control more than 30% of the ordinary share capital of the company at the time of the grant, either by holding it themselves or through the shareholdings of associates. For the purposes of an EMI, shareholders’ brothers and sisters do not count as associates.

Your options, their options

The total cap on the value of options at grant is

£3 million for the company or group as a whole. Each employee can be awarded options with a value up to £250,000 and the company is free to choose which employees are offered a grant and the size of each grant awarded. The value of the grant award must be agreed with HMRC prior to the grant.

Options must be granted over fully paid ordinary shares that are not redeemable. Many businesses create a new class of share exclusively for EMI, particularly if controlling shareholders do not wish employees to have any voting rights or be able to receive dividends on the same basis that they can.

Less to pay, now and in the future

The whole purpose of an EMI is to motivate staff, so it’s good to know they won’t suffer by having to pay tax or national insurance when they exercise their EMI option – as long as they do this within 10 years of the date of the grant and the price they pay is not less than the market value at the date of the grant. It is possible to set a lower option price compared to market value which will give a tax exposure at exercise, but if the company is growing in value this charge could be lower than would be the case for non-advantaged awards.

If they sell their shares, capital gains tax treatment should apply. The shares can all qualify for Entrepreneurs’ Relief. Unlike normal Entrepreneur’s Relief, the option holder does not need to own 5% of the share capital and the ownership period, which is now two years, starts from the date of the option grant. Assuming shareholders meet all the criteria for this relief, they will be taxed at 10% rather than 20%.

The company benefits too. You will obtain a corporation tax deduction at the date of the exercise. This is equivalent to the market value of the shares at exercise, less any amount paid by the employee for the shares.

HMRC approved

As EMI is an HMRC approved scheme, HMRC like to be kept notified of what is happening. Any grant of an EMI option must be notified in full to HMRC in strict deadlines or it will not be valid for the beneficial tax treatment. As noted previously, values must be agreed with HMRC prior to any option grant. Annual returns of share options must also be made by 6 July.

However, the administrative inconveniences are likely to be a small price to pay to achieve tax efficient and long-term employee incentivisation.

Our expert team can help you benefit by turning staff into motivated equity holders – and help you discover the most tax-efficient way of doing this.

To find out more, please contact us.