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Spotlight On… Enterprise Management Incentive (EMI) Schemes

Welcome to the latest edition of our ‘Spotlight On’ series, where our Head of Corporate Tax, Genevieve Morris takes an in-depth look at Enterprise Management Incentive Schemes.

Attracting and retaining talent has always been critical to business success, but as we emerge from lockdown and the economy recovers, the talent market is likely to be hotter than ever. If you’re looking to recruit or retain top talent, offering share options as part of their remuneration package could make your offer of employment very attractive to candidates.

Although EMI Schemes have been around for a long time, they are often under-utilised by businesses as a means to attract and retain talent. They are not suitable for all businesses but where the qualifying conditions are met they can be a cost-effective and flexible way to motivate and retain employees. With top talent becoming increasingly hard to attract and the post-pandemic talent market ‘hotting-up’, understanding how an EMI scheme operates and how it can help your business is more relevant than ever.

Who is it relevant to?

EMI schemes are aimed at growing entrepreneurial businesses and are most effective in businesses that are currently small but have high growth targets. The company must be independent (not controlled by another entity), have gross assets of less than £30m and less than 250 employees (full time equivalents).

A number of different sectors and businesses can qualify, but there are exclusions for businesses operating in legal or accountancy services, operating or managing hotels, nursing homes or residential care homes and similar establishments, dealing in land, commodities, futures or shares and banking, insurance, money-lending or other similar financial activities.

In addition to the company qualifying criteria there are qualifying criteria for the employee. They must be employed, meet the working time condition (which means working at least 25 hours a week, or 75% of their working time, if less) and they must not have a material 30%+ interest in the company (aggregated with interests of their associates).

What do you need to know?

An EMI Scheme enables a qualifying company to grant share options to qualifying employees up to a limit of £250,000 per employee, with a company maximum of £3m. These limits are calculated based on the market value at the date of grant.

There are no Income Tax or Corporation Tax implications on the grant of the option, and provided the exercise price for the share options is equal to at least the market value of the shares on the date of grant, there is no Income Tax when the options are exercised. Generally, however, there is a Corporation Tax deduction available to the company when the EMI options are exercised, calculated as the market value of the shares on the date of exercise, less the amount paid by the employee.

When the shares are eventually sold (usually on an exit event), the increase in value of the shares from the date of exercise to the date of sale is subject to Capital Gains Tax at rates of 20% or 10% provided the options were granted more than two years before sale.

EMI share options are incredibly flexible and can be subject to vesting criteria (linked to individual or company performance), exercise conditions (such as only being exercisable on an exit) and can be granted to any number of employees but, unlike some tax efficient share plans, do not need to be granted to all employees.

It is possible (and recommended) to agree the market value of the shares at the date of grant with HM Revenue & Customs (HMRC) in advance, which provides certainty that the future growth in the share value is subject to Capital Gains Tax – providing no disqualifying events occur.

What should you do next?

There are various conditions that need to be met in order for a company to grant EMI options, and some conditions (such as the working time condition and independence condition) that need to be met at least until the options are exercised. However, notwithstanding these hurdles, if the business and employees qualify an EMI Scheme can provide a highly motivating and potentially lucrative return to the employees. And don’t be put off by the word ‘scheme’ – EMI Schemes are specifically provided for in tax legislation.

Would you like to know more?

If you would like to know more about EMI schemes and if your business may qualify, please contact your usual Blick Rothenberg contact or Genevieve, using the details on this page. If your business does not qualify for EMI but you like the idea of incentivising your employees in this way, there are a number of alternative share incentive plans that we would be delighted to discuss with you.

Contact Genevieve