Your Enterprise Management Incentives Scheme Checklist
| Whilst there are several types of approved share scheme types, the flexibility of the Enterprise Management Incentives scheme (EMI) makes it very suitable to attract and retain key members of staff.
The employee is given the right (called the “option”) to buy shares at a certain price in the company, if certain performance hurdles (which can be tailored) are met. This option is then “exercised” when the shares are acquired, which is normally after a certain period of time has passed (say after 3-5 years of service) or a triggering event (say the sale of the Company to a third party) has occurred.
The EMI can be individually tailored to determine:
- who to award options to (the key employees you want to incentivise)
- what the price is (how much they have to pay for the share)
- what the terms will be (this is where you stipulate the performance hurdles)
- and when the options can be exercised.
The in’s and out’s of Enterprise Management Incentives (EMI)
- The employer grants options to its key employees, at this point there is no tax impact for either the employee or the company.
- When the options are exercised by the employee (i.e. the shares are acquired), he/she has taxable employment income only if the issue price is lower than market value at the grant date (i.e. if the shares were bought a discount compared to market value).
- It may be possible for the company to claim a corporation tax deduction on the price difference at the date of share acquisition and the price the employee paid.
- If two years have passed from the date of granting the option, the gain is generally subject to CGT at 10% by claiming business asset disposal relief (BADR, formerly known as Entrepreneurs Relief).
Conditions for the company to offer Enterprise Management Incentives
- The consolidated gross assets of the company (or the group) must be less than £30 million.
- Company/group of companies must have less than 250 employees
- Companies that carry out ‘excluded business activities’ are not allowed to offer EMI. For a list of exclusions see https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis.
- A company is not allowed to offer Enterprise Management Incentives if it is controlled by another company.
- The company (or other group company) issuing the options must have a permanent UK base.
- The grant of the options must be over the ordinary company shares
- The maximum value of unexercised options under EMI is £3 million.
- The granting of options must be for commercial grounds, not to avoid tax.
What conditions for the employee?
- EMI can only be issued to employees whose working time is 25 hours per week or where they spend at least 75% of their working time at the company.
- £250,000 is the maximum value of options which can be held, based on the market value at date of grant.
- An employee can only hold a maximum of 30% of the share capital in the company.
There are circumstances which can trigger a disqualifying event:
- If the company ceases trading or is taken over
- If the employee does not meet the working time requirement (see above)
- The employee leaves the employment
- If the share/option terms are changed which impact the market value or results in the options no longer qualifying.
Tip – We recommend appointing a solicitor to draft the legal documentation to help outline the terms.
Tip – It is good practice to undertake a share valuation and have this approved by HMRC’s Shares and Assets Valuation Team (a.k.a. SAV).
Tip – If you have any doubt about whether your company qualifies for EMI, it is possible to obtain advance assurances from HMRC.
How can Team SAS help?
We offer business and share valuation services to support your EMI scheme.
Get in touch if you would like a free ‘no-obligation’ call with us to discuss your business.
For more resources and business insight visit our resources section to discover a wealth of knowledge and know-how for your business needs. Click here…
Use of this guide is for reference only. The information included here was correct at time of publication. Specialist Accounting Solutions Ltd accepts no liability for any errors therein or any losses or damages arising from it. Please seek expert advice before embarking on an EMI scheme.