An Enterprise Management Incentive (“EMI”) scheme is an approved employee share scheme that is available to most trading companies, allowing employers to grant share options to key employee’s tax efficiently, as a reward for their efforts within the business and/or to retain and incentivise key staff.
EMI was introduced in 2000; however, recently there have been a number of changes that have made the scheme even more attractive.
Being that EMI schemes are approved by HM Revenue and Customs (“HMRC”) there are various conditions that must be met by the employer, employee and the options themselves. These conditions are not particularly difficult to meet or exhaustive but the tax advantages that can be obtained can be very beneficial to both parties involved.
This article sets out the qualifying requirements for an EMI scheme, the tax advantages that can arise from an EMI scheme and the recent beneficial changes.
Broadly, the following conditions must be met by the company;
The following conditions must be met by the employee;
The following conditions must be met as regards to the share options;
Generally, if an employer rewards an employee with unapproved shares, Income Tax and National Insurance Contributions will be charged on the difference between the market value of the shares and any amount paid towards them, in the same way as a salary or bonus.
If, however, EMI options are granted at market value there will be no charge to Income Tax or National Insurance Contributions at either grant or exercise of the options. Prior agreement of the value of the company shares at grant can be obtained from HMRC.
For example, if the value of the shares has increased substantially at the date of exercise, the employee will only be required to pay the agreed market value at the date of grant, satisfying this condition and ensuring that no Income Tax charge will arise. Once the options have been exercised, any subsequent disposal of the EMI shares will fall within the Capital Gains Tax regime and therefore any uplift in the value of the shares will be subject to the lower rates of Capital Gains Tax (in comparison to Income Tax rates of 20%, 40% and/or 45%/50%).
Importantly for the employer company, upon exercise of the options, the company can usually claim a Corporation Tax deduction equalling the market value of the shares at exercise less the amount paid by the employees. The employer also benefits from National Insurance Contributions not being payable.
In order for the employer to ensure that options granted will qualify under the EMI scheme, the company can obtain prior clearance from HMRC confirming; (i) that the employer is a qualifying company, and; (ii) what the market value of the shares is at the date of grant.
It is also necessary to notify HMRC once the aforementioned options have been granted within certain time limits. If these deadlines are missed the options granted will not qualify under the EMI scheme and thus will be deemed unapproved share options.
There have been important recent tax changes introduced in respect of EMI schemes.
Firstly, the total value of options available to grant per employee was increased from £120,000 to £250,000 from 16 June 2012.
Secondly, the rules surrounding Entrepreneur’s Relief (“ER”) will be relaxed in relation to the disposal of EMI shares after 6 April 2013. ER is a specific Capital Gains Tax relief whereby individuals who dispose of business assets can qualify for a reduced Capital Gains Tax rate of 10% (lifetime limit of £10,000,000). As regards to trading company share disposals, the current conditions that must be met in order to obtain ER are that the individual must hold at least 5% of the issued share capital, for at least 12 months, as well as being an employee of the company at the time of disposal. EMI share holders will often fail to meet the 5% and 12 month conditions and thus employees who dispose of EMI shares often don’t qualify for ER.
However, the changes from 6 April 2013 will mean that, in relation to EMI shares only:
An EMI scheme may be attractive to companies who wish to:
Due to the favourable tax treatment of EMI schemes it is possible for an employee to receive shares free of Income Tax and National Insurance Contributions and then potentially only pay Capital Gains Tax at 10% upon disposal of their shares, if the conditions for ER are met.
The EMI scheme has always been an efficient way for company’s to offer shares to incentivise and/or retain key staff and now that some of the old limitations to the tax rules have been removed or relaxed to improve the tax position further, an EMI scheme provides an even more effective and attractive solution for many small and medium-sized companies.
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