When key workers have gone beyond the call of duty and played an important part in the growth of your business, it’s nice to be able to reward them in a meaningful way. While pay rises and additional time off will doubtless be well received, EMI share options can both incentivise and help you retain key staff.
What is the Enterprise Management Incentive (EMI)?
EMI is an approved employee share scheme, available to most trading companies, which allows businesses to grant share options to key members of the team in a tax efficient way.
The scheme was originally introduced in 2000, but since then it has undergone a number of changes that have made the scheme an even more attractive proposition for small and medium-sized businesses.
EMI share options are approved by HMRC, so there are a number of conditions that must be met by the employer in order to qualify. However, these conditions are not particularly restrictive, which means the scheme is an option for a diverse range of businesses.
EMI qualifying criteria
The company must meet the following conditions to qualify for the scheme:
- Have gross assets valued at less than £30million;
- Be a trading company i.e. not an investment company;
- Must not be a subsidiary company controlled by a parent company;
- Have fewer than 250 employees at the time the share options are granted.
There are also certain qualifying criteria placed on employees. They must:
- Be an employee of the issuing company, or an employee of a subsidiary;
- Spend at least 25 hours a week and at least 75 percent of their working time as an employee of the company;
- Hold no more than 30 percent of the shares in the company.
The scheme also includes particular types of shares. They must:
- Be ordinary, non-redeemable shares;
- Be exercisable within 10 years of the grant;
- Not exceed a market value of £250,000 per employee at the date of the grant;
- Be non-transferrable and have the terms and conditions agreed in writing.
What are the benefits?
Under the terms of the scheme, shares can be bought up to a value of £250,000 without income tax or National Insurance having to be paid on the difference between the amount the employee pays for the shares, and what they are actually worth.
For example, if the value of the shares has increased substantially by the date they are bought, the employee will only have to pay the agreed market value on the date the shares were granted, and no income tax will arise. When the shares are sold, they will be subject to capital gains tax of 10 percent (if they qualify for Entrepreneurs Relief) if the value of the shares rises.
For the employer, once the employee has taken up the share option, the company can usually claim a corporation tax deduction that equals the value of the shares, less the amount the employee paid for them. National Insurance contributions do not have to be paid.
How does the EMI scheme work?
To set up the scheme, the company’s articles of association will have to be checked and possibly altered, and option scheme rules will need to be drafted. The company will also have to be valued to establish the market value of the shares. This valuation will then need to be agreed with HMRC.
Provisions can be included in the terms of the scheme that mean if employees leave the company, they cannot take the shares with them. There will also be details about when the shares can be bought and whether certain targets need to be met first.
In terms of tax, the scheme must be registered with HMRC within 92 days of it being established, and the same timeframe applies to any options being granted.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business.