writes Rodney Style, partner, Haines Watts
Chartered accountants Haines Watts presents a series of articles based on its blogs and welcomes your feedback at hwca.com/blog
Enterprise Management Incentive (EMI) schemes are government approved, aimed at smaller companies. They provide share options to key employee’s tax efficiently, as a reward for their efforts within the business or to retain and incentivise key staff.
Due to favourable tax treatment of EMI schemes it is possible for an employee to receive shares free of income tax and national insurance (NI) contributions and then potentially only pay capital gains tax at 10% upon disposal of their shares.
Setting up an EMI scheme sooner rather than later brings benefits too in terms of the HMRC share valuation. For an owner with ambitious growth plans for their business, it’s in their interest to keep this valuation as low as possible.
Due to the tax advantages, it is necessary under European law to have approval from the European Commission under the EU State Aid rules. EU State Aid approval was renewed on May 15.
Companies can now proceed to grant new options under existing schemes or set up new schemes, confident that the tax advantages will apply.
• Share-ownership is a motivating factor for key employees, as it provides a vested interest in the ongoing success of the business.
• Employees feel like they’ve received a potentially lucrative bonus.
• Employees are less likely to leave, which helps secure your succession planning. There is no tax suffered by the employee or employer on the grant of a share option.
• A motivated workforce concentrating on the long-term future of the business could help a company be more attractive to potential buyers.
A useful way to encourage loyalty:
• EMI shares are usually offered as options with a 10-year lifetime. Businesses with a low staff turnover can plan better for the future.
• All HMRC share valuations are done in advance of setting up an EMI scheme. Employers and employees know where they stand.
• Companies should receive a deduction in tax on the difference between the share option exercise price and the market value of shares at the point of exercise (often at the point of sale).
• Capital gains tax applies at just 10% to growth in shares held through an EMI scheme when they are sold as long as they meet the qualifying conditions.
• The allocation of share options under an EMI scheme doesn’t incur any tax or NI liability for an employer or the employees who are receiving the benefit.