Enterprise Management Incentive Schemes: Taking a look into the tax benefits

Looking for a tax efficient way to attract and retain top talent? A share scheme option scheme could be ideal.

As a business you can offer your employees the opportunity to acquire shares in your company through a share option scheme known as a Management Incentive Scheme. These Management Incentive Schemes are a strategic tool used by businesses to ensure that key people are motivated, aligned with both company and shareholder goals, and committed to driving the company towards long-term success.

HM Revenue and Customs have approved certain types of share options schemes, and these schemes may provide advantages to both the company and employees. An Enterprise Management Incentive Scheme (EMI) in particular, offers a variety of benefits and tax advantages.

In this article we will delve into the features and benefits of offering an EMI scheme, the tax advantages for both the company and employee, and practical steps to support the implementation and management of an EMI scheme.

Why use an EMI scheme?   

EMI schemes are designed to help small and medium-sized organisations attract, retain, and motivate their key people by granting them tax-advantaged share options.

Eligibility

Company Eligibility – A company must be independent and cannot be controlled by another company. However, if your company is controlled by another company, it may still be possible for the share options to be granted in the parent company instead.

The company must have gross assets of £30 million or less and fewer than 250 full-time employees.

Employee Eligibility – The scheme does not need to be made available to every employee, and therefore it can be used as a way to incentivise key members of the team. However, employees must work at least 25 hours per week or, if less, at least 75% of their total working time. The maximum value of unexercised options that can be held by one employee is £250,000 and individuals cannot have an interest over 30 percent in the company under the rules of the scheme.

Performance Criteria              

It is possible for measurable performance conditions to be attached to the share options. These conditions can be determined by the company and may be tailored for each individual employee. They are generally based upon an individual’s KPIs as well as the company’s results, and will form part of the EMI documentation.

Other Conditions

Share options can be subject to other conditions, so that they are only able to be exercised after a certain period of time for example. It is common to arrange the scheme so that the options can only be exercised immediately prior to a future sale of the business.

The share options can be structured such that the number of shares exercisable on company sale is determined based on the sale value. This allows flexibility in terms of the option holders right to capital proceeds on a future sale and enables the options to be used in a similar way to “hurdle shares”.

There are however some restrictions on conditions to be aware of. Options must be capable of being exercised within ten years, and the options will automatically lapse should the individual cease to be an employee prior to their exercise.

So what are some of the tax advantages?

Tax Advantages for the business lie primarily within Corporation Tax.

The company will receive a corporation tax deduction on the exercise of options granted under an EMI scheme, provided that certain conditions are met. The relief is given for the accounting period in which the EMI option is exercised on the difference between the market value of the option shares on the date of exercise and the exercise price.

The Tax Advantages for Employees include:

Income Tax: Employees do not have to pay income tax or National Insurance contributions (NICs) when the options are granted or exercised if the exercise price is at least the market value at the time of grant.

Capital Gains Tax: When the shares are sold, employees may be liable for Capital Gains Tax (CGT) on the difference between the sale price and the market value at the time the options were granted, but they may be able to claim Business Asset Disposal Relief, reducing the CGT rate as low as 10%.

6 practical steps to establishing an EMI scheme

In order to establish an EMI scheme, the following is required:

• Get the valuation of your shares issued. It is important that a fair acquisition price is set and this will need to be formally recorded under the documentation.
• Agree the valuation with HM Revenue and Customs share valuation division.
• Produce your scheme documentation. This will establish the rules of the scheme and will also formally record the exercise price and conditions that each employee must satisfy in order to be able to exercise their options and acquire shares in the company.
• Submit notification of the grant of the shares to HM Revenue and Customs, within the statutory timescales.
• Submit the annual ‘Employment Related Securities’ returns to HM Revenue and Customs by 6th July following the end of each tax year.
• Further valuations of the company when the EMI options are exercised to quantify the corporation tax deduction available.

Get in touch

To find out how we can support your business with an Enterprise Management Incentive Scheme, give us a call on 0203 912 9933, or email info@verallo.com.