Enterprise Management Initiative (EMI) schemes can be a great way of recruiting, retaining and incentivising key staff. Whilst offering employee share options is particularly popular with younger entrepreneurial companies, they can also be helpful for more established businesses.
EMI schemes offer very favourable tax treatment to employees through granting options to employees, which entitles them to acquire shares at a later date, by exercising their options. No income tax or NIC is payable at the time when the options are granted. Provided that the “exercise price” at which the employee can buy the shares is not less than their market value at the time when the options were granted, there is also no income tax or NIC charge when the options are exercised. This means there’s no income tax or NIC on the uplift in market value. In contrast, any such gain arising on non-EMI options would be subject to income tax at rates ranging from 19% to 47% (Scottish rates) and in certain circumstances, this must be accounted for under PAYE along with the associated employer and employee’s NIC.
5 points to consider when contemplating an EMI scheme
1. Limits – EMI is currently limited to trading companies with up to £30 million in gross assets and 250 employees. The company which grants the options must not be controlled by any other company – although groups of companies can still operate EMI schemes, as long as the options are granted by the top company in the group.
2. Consideration of option price and conditions – In order to provide certainty for employees over their tax position, it is recommended that the market value of the shares should be agreed with HMRC before the options are granted. While granting options at a discount on market value leads to an income tax charge on exercise, it’s certainly open to employers to do this and they may wish for example to use nominal value in some cases.
3. Employee incentivisation – On selling their shares, the employee is liable to capital gains tax (CGT) – generally at only 10% of the gain – and, if not already used, they can use their annual CGT exemption which changes each year and is currently £6,000. It is common for employees to fund the option exercise price by selling the shares straight away. Many schemes are “exit only” schemes which allow employees to exercise only on certain major events such as a sale of the business. In addition, employers can incorporate performance milestones to be achieved before options can be exercised.
4. Costs and benefits – From a company perspective, there is usually a tax deduction when employees exercise their options, based on the uplift in market value between grant and exercise. Although there are fees for setting up the scheme, ongoing running costs are modest. There is a requirement to notify HMRC each time options are granted. In addition, the scheme must be registered with HMRC when it is set up, and a return must be submitted each July.
5. Who qualifies? – Qualifying employees must work for the company at least 25 hours each week, or for at least 75% of their total paid working time (including self-employment). Each employee can hold unexercised options worth £250,000.