Enterprise Management Incentives (EMI)

The Enterprise Management Incentive (EMI) is a scheme that allows employers to grant share options to selected employees, enabling them to acquire shares in the company at a future date without incurring a tax bill until the shares are sold. If your business is located in the Nottingham area, AHACCOUNTANTS can guide you in establishing an EMI scheme.

What Are Enterprise Management Incentives (EMI)?

Retaining and motivating staff is crucial for many employers. Research indicates a strong link between employee share ownership and increased productivity. The UK government has implemented various mechanisms for companies to offer shares to employees without imposing substantial tax liabilities. When qualifying conditions are met, EMI becomes one of the most tax-efficient and flexible options available.

EMI allows selected employees, often deemed key to the business, to acquire significant numbers of shares through share options. While EMI offers substantial tax advantages, the primary motivation behind any incentive scheme should align with the business’s commercial objectives.

Key Features of EMI

1. Deferral of Tax:

1. • If shares are simply granted to an employee, the market value is taxed as earnings, which can be financially burdensome. Instead, granting options allows the employee to defer tax liabilities until the options are exercised.

2. Granting Options:

1. • Employees are granted options for shares that can be exercised within ten years of the grant date. To qualify for tax reliefs, these options must be exercised within the specified timeframe.
   • There is a statutory limit of £250,000 on options granted per employee on or after 16 June 2012.

Tax Benefits for Employees

• The grant of the option is tax-free.
• No income tax or NICs are due when the option is exercised, provided the purchase price for the shares equals the market value at the grant time.
• EMI rules allow for nil-cost and discounted options, though these incur an income tax and NIC charge based on the difference between the exercise price and the market value.

When shares are acquired and subsequently sold, the employee will face a capital gains tax (CGT) liability on any appreciation in value. The rates are:

• 10% for gains below the income tax basic rate band.
• 20% for gains exceeding this limit.

Business Asset Disposal Relief (BADR) may apply, reducing CGT liability to 10% under certain conditions.

Benefits to Employers

• Employee Retention and Motivation: Employees gain a stake in the company, enhancing their commitment.
• Cost-Effective: Options do not directly cost the employer compared to salary increases.
• NICs: Typically, there are no NICs charges for the employer when options are granted or exercised.
• Tax Deductions: The employer can claim a corporation tax deduction broadly equal to employees’ gains.

Points to Consider for EMI

1. Eligibility:

1. • The company must operate one or more qualifying trades, have gross assets under £30 million, and not be under another company’s control. Certain trades (e.g., property development, farming) are excluded.

2. Employee Selection:

1. • Employees controlling more than 30% of the share capital cannot be granted options. Eligible employees must work at least 25 hours a week or 75% of their time for the company.

3. Type of Shares:

1. • Shares must be fully paid ordinary shares, with flexibility in terms of voting rights and other conditions.

4. Exercise of Options:

1. • Options should be capable of being exercised within ten years of the grant but don’t require a fixed date. Conditions for exercise can include achieving performance targets, company sales, or market flotations.

Conclusion

EMI is an effective tool for companies seeking to motivate and retain employees through share ownership while offering significant tax benefits. If you wish to explore establishing an EMI scheme or have any questions regarding the process, contact AHACCOUNTANTS for expert guidance tailored to your business needs.