The Enterprise Management Incentive scheme (EMI) is a government initiative introduced in 2000 to offer a tax-advantaged share option for both potential and existing employees. This scheme effectively allows companies to offer equity to their staff, either as a way of motivating or retaining them or as a way for cash-tight start-ups to attract high-calibre employees. While there is a number of requirements that small and medium business ventures must meet in order to be eligible for inclusion under this scheme, for those that are able to meet them, the EMI represents a fantastic mechanism for improving their company’s pull and incentivising their operation.
At Tax Agility, our tax accountants can provide an insight into the various tax advantages, qualifying conditions and benefits for both employee and employer, as well as how best to implement the scheme and the parameters by which it can be used.
How to reward your team and gain tax advantage through the Enterprise Management Incentive scheme
As an astute business strategy for start-ups looking to grow their company organically, the EMI scheme provides smaller businesses with the ability to attract talented individuals without offering the enormous cash salaries usually reserved for larger established companies. Utilising share options as a means of incentivizing employee investment in the ‘vision’ of a company, the EMI scheme enables start-ups to grow and nurture their business – motivating employees to work more effectively and efficiently with the promise of potential returns and shareholder value.
In essence, if a start-up company has a brilliant idea and requires brilliant minds in order to reach its potential and bring this idea to fruition, offering EMI share options is a useful tactic for recruiting the types of individuals necessary, in turn, creating value for the employee and employer. Simply put, if you want to ensure that the quality of work being done is of the highest standard, then investing in your workforce through EMI is an effective tactic for raising the stakes. The EMI is effectively a win-win in such circumstances – if an employee’s work is good, it’s good for them and good for their company.
Tax advantages of the EMI scheme
In normal circumstances, when an employer offers share options to an employee, the difference between the current market value of their shares and the initial amount paid towards them is taxable under normal Income Tax and National Insurance Contributions conditions, just like a salary or bonus.
Under the EMI scheme, however, the employee can exercise their options at a future date when the value of the shares has appreciated and will incur no Income Tax or National Insurance Contributions. Moreover, any subsequent disposal of shares will also be subject to a lower rate of Capital Gains Tax.
The advantages are not strictly for employees either. The company can also claim a corporation tax deduction on the exercise of the option, with reference to the market value of the shares less the amount paid for them.
Does your company qualify?
In order to meet the conditions of the EMI scheme, your company must meet the following criteria:
- Cannot exceed £30 million in gross assets.
- Must be a trading company, as opposed to an investment company.
- Cannot be a subsidiary, or be controlled by another company (although the parent company can qualify for EMI).
- Must not employ more than 250 full time (or equivalent) employees at the date that the share options are granted.
There are also ‘excluded activities’ or ‘non-qualifying trades’ that disqualify a company from offering EMI to its employees. These trades include banking, farming, property development, legal and accounting services and shipbuilding. Moreover, the trade is required to be carried out on a commercial basis with the goal of making a profit and must be done so wholly or mainly within the UK. The company does not, however, need to be resident or incorporated in the UK.
Does the employee meet the conditions?
To be eligible for EMI share options, an employee similarly has to meet certain criteria. They must:
- Be employed by the company or a qualifying subsidiary, including director positions.
- Spend a minimum of 25 hours a week, or at least 75% of his or her working time on the business if it is fewer than 25 hours.
- Control no more than 30% of the ordinary share capital of the business, either directly or indirectly.
The share options offered under EMI have to abide by the following rules:
- They must be fully paid up, non-redeemable ordinary shares.
- The market value of the option must not exceed £250,000 per employee at the date of grant. Options above this limit will not be approved under EMI.
- The options are exercisable within ten years or the tax advantages will expire.
- Terms of the option must be made by a written agreement, under schedule 5 ITEPA 2003, and include details of the date of the grant, the number of shares involved, the option price, the time and method of exercise, any restrictions and any performance conditions.
Events that may disqualify the relief
- Ceasing to meet the independence test.
- Ceasing to carry on a qualified trading activity.
- A non-qualifying conversion of the share capital into another instrument, or certain alterations to the share capital of the company.
- Certain variations to the terms of the options (that would increase share value or no longer meet ITEPA 2003 requirements).
- If an event occurs that may disqualify the relief, the options will need to be exercised within 40 days so as to retain any tax benefits. (If this does not occur, tax will be charged on the uplift between the date of exercise and the disqualifying event).
Process of implementing an Enterprise Management Incentive scheme
Before embarking on the course of applying for the EMI scheme, small and medium business ventures should be aware of the above-mentioned requirements. This should enable you to gauge whether or not the initiative is suitable for your business type and structure.
Once you have decided that EMI is right for you, registration needs to be done through HMRC. You can obtain advance clearance for offering EMI options from HMRC once confirmed that your company qualifies. The process requires registration of your scheme, then a notification to HMRC that you are planning on granting EMI options, and then finally, the grant of the EMI option.
The process itself can be quite complex and complicated, so it’s often advisable that you liaise with your accountant in order to discuss your eligibility and the steps for registering with and notifying HMRC. If you’d like to learn more about the process or are interested in beginning registration, please feel free to contact Tax Agility on 020 8108 0090 and speak with one of our specialist small business accountants.
This blog is a general summary and is not exhaustive. It should not replace professional advice tailored to your specific circumstances.