More companies than ever are actively targeting and poaching staff from their competitors. As a result, entrepreneurial companies wanting to recruit and retain high calibre staff are using tax efficient Enterprise Management Incentive Schemes (EMIs). Available to qualifying UK and non-UK resident companies, the EMI is a creative method of remunerating employees and providing those employees who fall within the scope of UK tax, the opportunity to avail of generous tax benefits.
he last few years have witnessed a surge in the number of companies seeking to incentivise employees by establishing Enterprise Management Incentive Schemes. Key staff know their value and if companies only offer standard remuneration packages it is often difficult to keep those employees who are important to the business. It is widely acknowledged that EMIs help innovative and growing companies attract and retain the best talent.
The EMI is a share scheme which enables many companies, both UK resident and non-UK resident, to grant eligible employees the opportunity to acquire shares in their employing company on advantageous terms. From an employee's perspective, the potential to share in the future capital growth of the company is a powerful incentive to remain focused on the goals and targets of the business and a chance to share in the rewards of their own efforts. For the employer, the alignment of the employee's interests with those of the shareholders can only have a positive impact on employee motivation and loyalty. Where smaller businesses do not have the cash resources to provide competitive salaries and bonuses, the ability to offer tax efficient share-based remuneration has proven to be most successful in retaining those vital to the future of the Company.
THE BASICS
Broadly speaking, a company can now select whoever they want to join the scheme provided the employee works for at least 25 hours a week and does not already own more than 30% of the equity in the business.
Unlike other share schemes, it does not require advance Inland Revenue approval and is a great deal more flexible than other favoured schemes. Companies will often have unique requirements and it is possible to tailor each scheme to the particular design requests of the company. The EMI options must be granted over Ordinary Shares that are fully paid and not redeemable. The equity can be subject to certain restrictions or risk of forfeiture, for example, if performance conditions are not met. Each option must be capable of being exercised within 10 years and there is a limit of £100,000 on the market value of options granted to each participating employee. There is, however, a limit on the total value of options that can be granted by any one company under EMI of £3 million.
For companies to qualify they must have maximum gross assets of no more than £30 million, and for groups, this applies to the assets of the group as a whole. The company, whose shares are the subject of the option, must be independent and the company (or group) must be trading. However, care must be taken as certain trades may not qualify and there are strict requirements in connection with the level of trading activity which must be carried on in the UK.
TAX BENEFITS
The tax benefits available under the EMI legislation are extremely generous for those employees falling within the scope of UK tax. (Non-UK employees will be taxed according to the legislation which applies in their specific tax jurisdiction).
For UK employees, no Income Tax or National Insurance Contributions are due either at the date of grant or on exercise of the options (provided the option is not granted at a discount). In fact, EMI options generally only give rise to Capital Gains Tax ("CGT") when the shares are eventually sold. Importantly, unlike other share schemes the tax favoured taper relief period for CGT starts on the date the option is ‘granted’ (rather than the date the shares are ‘acquired’) resulting in employees benefiting from tax rates as low as 10%. With bonuses often resulting in overall effective tax rates of 48% it is not surprising therefore that so many companies have opted to introduce equity as a means of rewarding valuable staff.
EMIs bring several significant tax advantages to the business and the employees participating in the scheme, who fall within the scope of UK tax. Nevertheless, events could occur after the grant of the option which would trigger a time limit for action to protect the available tax benefits. It is essential therefore that both companies and option-holders keep arrangements under review.
So, if you have talented employees who are vital to the success of the business and you are looking for a cost effective way of creating loyalty and securing the long term services of your core team, should you be considering an EMI too?
Example omitted from online version of this article.
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