What is Enterprise Management Incentive?
Plenty of tax incentive schemes has been recently introduced by HMRC in order to boost a business-friendly environment. Enterprise Management Incentive (EMI) scheme is one of them. This scheme ensures to maximizes the probability that companies could retain their employees and align their interests with that of the company.
EMI is established with a specific aim to help small and medium-sized companies hire employees and retain them by offering share options. This also aligns employees’ interests with that of the company so they could be working with a mindset to work in a manner that would be beneficial for both, the company and the employees. This strategy is used to retain key employees for a long-term purpose. These share options are tax-beneficial in nature.
Features of EMI
To match the level of salary being paid in other companies, this scheme is also used for compensation for higher salaries.
Such options provide the right to employees to purchase the entity’s shares at a price agreed at the grant date.
If the shares’ value increases between the option and exercise dates, the employee makes a profit from it. But if the value decreases, the employee has the choice to lapse the option. So, no loss is earned by employees.
As all the shares come with some rights. They can be voting or non-voting in nature. So, the rights of the shares issued under EMI’s scheme can be restricted if the company wants.
The employee must not be able to redeem back its shares into cash so the shares must be irredeemable.
Conditions for company
A company can grant EMI options over fully paid shares, with a market value of up to £250,000 to each qualifying employee. It will be issued for a 3-year period provided the total value of the options granted to all employees does not exceed £3 million.
Such giving of options can be linked to performance targets set for the employee. If he/she achieves the targets he/she’ll be granted share options. An important thing to note here is that the company’s assets must not exceed £30 million.
To qualify for the purpose of EMI, a company must:
- be a trading company.
- not carry out excluded trading activities*
- not be parented or controlled by any other company.
- have fewer than 250 employees
Note: Excluded activities include dealing in land, shares and other financial instruments, banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities, leasing, taking royalties or license fees, professional services, property development, agribusiness and woodlands, hotels and the like, nursing or residential care homes, and service companies.
The company must notify HMRC of any grant of EMI options within 92 days.
Conditions for employees
Employees who can qualify for this scheme:
- Executive directors who work for at least 25 hours/week or 75% of their time.
- Not non-executive directors.
In order to qualify, employees must not be holding more than 30% of the company’s equity at the time of grant.
The law doesn’t provide an exact time period at which the options must be exercised instead it provides a range that states that the options must be exercised between 3-10 years.
If the employee holding the options dies before exercising the options, the executors of the person can take financial benefit of the options unless the person has willed not to do so.
How does the EMI Work?
No tax or National Insurance Contributions (NICs) are payable by employees on grant of an EMI option.
No tax or NIC is payable on the exercise of the options provided the exercise price is the same as that of its market value. If not, the difference between both of these values will be subject to income tax and NIC.
If shares are to be sold now and income tax was payable at the exercise date, Capital Gains Tax (CGT) will be payable on the difference between sales value & market value at the exercise of options.
But if shares are to be sold now and income tax was ‘not’ payable at the exercise date, Capital Gains Tax (CGT) will be payable on the difference between sales value & exercise price.
It is important to note that capital gains tax is only payable if the value of the gain exceeds the annual exempt amount of the individual, otherwise, no CGT is payable.
There’s also another benefit for EMI scheme participants that the taper relief will be available from the date when options are granted rather than the exercise date which further reduces the chargeable gain.
Restriction of relief
If any of the following disqualifying events happen, tax relief is restricted:
- company’s gross assets exceed £30 million in value
- employees cease to be eligible
- the company becomes parented or controlled by another company
- the company is no longer a trading company or carries on any of the excluded activity
- terms of the options change significantly or insignificantly
- the share capital of the company alters and its value changes
- a participant goes over the £250,000 limit
Benefit for the employer
EMI scheme also brings benefit to the employer as EMI’s option’s value at the grant date (including EMI’s setup and admin costs) can be deducted by the employer for taxation purposes thus reducing the profits employer will be paying.
Legal advice
Legal advice will be beneficial before setting up an enterprise management incentive scheme
