ENTERPRISE MANAGEMENT INCENTIVES (EMI)

- A POWERFUL

SMEs often face challenges in attracting and retaining talent, putting them at a disadvantage compared to their larger competitors. However, securing the right individuals for key positions and retaining them is crucial for success.

While share incentives as part of remuneration packages might seem more common in large companies, EMI specifically targets SMEs, offering favourable tax treatment for both employers and employees.

EMI encourages smaller businesses to offer share ownership to key employees and directors through option arrangements. EMI aims to assist growing companies in seeking, retaining, and rewarding key employees for playing their part in the success of the business, especially if a company lacks the finances to offer competitive remuneration packages.

Tool Sme

Clive Haworth Senior Manager clive.haworth@etctax.co.uk

Overview

A share option grants someone the right to purchase shares at a fixed price in the future. Such options are highly effective in incentivising and retaining key employees since, if the shares appreciate in value, employees can reap significant gains upon selling them and pay less tax than they would on other forms of remuneration or incentives.

EMI options can be granted by independent trading companies with gross assets not exceeding £30 million.

Options over shares with an unrestricted market value (UMV) of up to £250,000 per employee can be granted at the date of issue. Generally, there will be no income tax or NICs (National Insurance Contributions) when the options are granted or exercised. A qualifying company can grant EMI options up to an overall limit of £3 million.

There is no approval process or clearance mechanism for EMI per se, but the share valuation can be agreed in advance with HMRC. However, companies must notify HMRC within 92 days of granting an EMI option. Additionally, there is an annual reporting requirement.

Tax Benefits For the Employee

Grant of Options: No income tax or National Insurance is applicable upon the grant of a qualifying EMI option.

Exercise of Options: If exercised within ten years of the grant, with no disqualifying event, and no discount at grant, there will be no income tax or National Insurance on exercise.

Sale of Shares: Capital gains tax will be payable on the disposal of the shares. Business Asset Disposal Relief may apply in many cases, resulting in a tax rate of just 10%.

For the Company

When an option is exercised, the company obtains a corporation tax deduction for the EMI "Profit" – i.e., the difference between the market value of the shares at the time of exercise and the total amount paid for the option grant or exercise.

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Practical Considerations Valuation

Prior to granting options, a valuation must be agreed with HMRC for the shares. It is important to have experienced advisers negotiate with HMRC to ensure an optimal value is agreed, potentially involving a significant minority discount for smaller numbers of shares.

Flexibility – Scheme Design

The key to maximising the benefits of the EMI scheme lies in its design. The scheme offers substantial flexibility in terms of conditions that can be placed on exercise and sale. For example:

• Exercise and the number of options can be linked to the attainment of performance targets – individual, corporate, or both.

• Exercise may be tied to specific events or dates, subject to meeting pre-agreed targets. There are few limitations, enabling the scheme to be tailored to the specific requirements of each business.

Qualifying Conditions

For the option to qualify conditions relating to the company and the employee must be met. EMI can be ideal for both start-ups and other SMEs seeking to enhance shareholder value, potentially in preparation for an exit event and can also be customised to achieve objectives.

If you are interested in finding out more on Enterprise Management Incentives and the benefits of introducing an EMI or other share incentive scheme, please do get in touch.

Editor’s note: It is worth noting that the government has recently published draft legislation to extend the time limit for notification of the grant of EMI options. Currently, companies must notify HMRC of an EMI option grant within 92 days of the date of grant. This limit will be extended for EMI share options granted on or after 6 April 2024. Instead, companies will need to notify HMRC of an EMI option grant on or before the 6 July following the end of the tax year in which the grant was made.