Recognising and rewarding talented individuals within your team is an essential part of retaining an effective workforce.
However, many businesses are looking for another way of remunerating staff members that does not harm cash flow or significantly increase the tax bill of the company or the individual.
An Enterprise Management Incentive (EMI) scheme is one such way in which a business can reward success in a tax-efficient manner.
What is an EMI scheme?
EMI is a government approved, tax-advantageous share option scheme that is predominantly used by small to mid-sized UK businesses looking to share the financial success of the company with its team.
Share option schemes offer a lot of flexibility to reward team members that can help to drive productivity and retain key workers within a business.
To put it simply, EMI option schemes allow businesses to:
- Attract and retain the best employees.
- Provide employees with a sense of ownership of a business.
- Benefit from a more productive, incentivised and committed workforce.
- Increase remuneration in a tax-efficient manner.
What are the tax advantages of an EMI scheme?
When a company establishes a scheme, it selects employees and gives them the option of acquiring shares over a prescribed period, subject to qualifying conditions being met.
This brings with it the following tax benefits:
- There is no Income Tax or National Insurance charge on the exercise of an EMI option for an individual as long as it was initially granted at market value.
- Where the shares increases in value between the time of grant and when the options are exercised, the uplift is not charged to Income Tax or National Insurance. .
- There will be a Capital Gains Tax (CGT) charge when the employee disposes of their shares if the sale price exceeds the value per share at the time of granting the options – CGT is at a lower rate than Income Tax.
However, these tax-advantages can be lost if the company:
- Fails to establish its EMI scheme within the terms of the legislation;
- Does not notify HM Revenue & Customs (HMRC) within 92 days of the grant of an EMI option, or
- A disqualifying event occurs and option holders fail to exercise their share options within 90 days.
It is important, therefore, that directors seek advice beforehand to ensure that the scheme that they establish qualifies and that the exercising of shares is conducted properly.
Do all businesses qualify?
A business can utilise an EMI scheme if it meets various conditions including the following:
- 249 or fewer employees.
- Gross Assets of less than £30 million.
- Not majority-owned or controlled by another company.
- Not in an excluded industry (banking, farming, property development, provision of legal services, shipbuilding, or leasing.)
- There is also a £3m limit for value of share options held by all employees.
Employees must also meet certain eligibility criteria to obtain shares, which include:
- Work at least 25 hours per week or 75 per cent of total working time as an employee of the company.
- Must not hold more than 30 per cent of the company’s shares.
- Cannot hold share options worth more than £250,000 at the time of grant.
If you are unsure of your business’s eligibility or whether certain employees can be given shares it may be best to check beforehand with a trusted professional adviser, as failing to establish eligibility could lead to the scheme being disqualified.
To help you understand the process of establishing an EMI share option scheme we have prepared a helpful chart below:
Confirm eligibility
Make sure that the business and employees qualify for EMI share options
Obtain valuation
A business should propose a valuation to use in the scheme and agree it with HMRC
Create a share pool
Establish the employee share pool and obtain approval from directors/shareholders
Grant options
Options can now be granted to employees
HMRC registration
Within 92 days of establishing the pool register your EMI scheme with HMRC. This is usually done alongside notification of options granted.
File scheme
Finalise the scheme and file it with HMRC to qualify for the advantages of EMI
Submit end of year returns
An EMI annual return must be submitted by your company by 6th July of each year. This return must include an activity within the scheme that has occurred in the prior tax year. If nothing happens in the year a return should still be submitted stating this.
Start this process today with our EMI experts
Establishing an EMI share scheme within your business can be very rewarding, but it is not without its challenges and it can take away the focus of running a business.
This is where our experienced team of experts can help you to set up and monitor your EMI scheme and assist employees in future if they wish to exercise options to ensure the maximum tax advantage is obtained.
To find out how our team can help you create and manage a successful, compliant share option scheme, please contact us.
