For many of the companies we look after, incentivising key employees is a strategic move to benefit the business. For some, however, COVID has resulted in there being less cash available to pay bonuses or fund salary increases, though the desire to incentivise still exists.
This is why we’re advising on an increasing number of Enterprise Management Incentive (EMI) schemes. EMI is tax-efficient, it doesn’t necessarily mean giving away equity immediately and, although the scheme rules are complex, it’s still a lot simpler and more effective than other share schemes.
How EMI works
In short, a trading company grants options to an employee to acquire shares now or at a later event like an exit (some companies are excluded including those involved in legal, property investment and leasing activities). No tax arises when the options are granted and, provided the employee pays market value based on today’s value for the shares, then no Income Tax charge arises when the options are exercised. The employee pays Capital Gains Tax when the shares are sold and will qualify for Entrepreneurs Relief if the options have been held for two years.
- EMI is a good way of binding employees to a company as the option will normally lapse when they leave employment
- You can stipulate when an employee is able to exercise their shares, for example when meeting certain performance targets or an exit event
- The market value of the shares under option can be agreed with HMRC which gives certainty on the tax position
- The shares under option can be structured as “growth shares” if desired so they don’t participate in the value earned to date and current market value can be reduced to a minimum
To qualify for EMI both the company and the employee or director have to fulfil certain conditions including that the employee needs to work in the business at least 25 hours a week or 75% of their working time. This needs to continue while they hold the option or else they can be forced to exercise or lose their options. HMRC have recently confirmed that if an employee is furloughed or has had their working hours reduced because of COVID, the time they would have spent in the business will still count towards their working time.
How we can help
There are other qualifying conditions to meet and a range of things you should consider before going ahead with an EMI scheme, but we can help with all of this. Most importantly, we can assess the suitability of an EMI scheme for your circumstances and structure it to meet your needs. Needless to say, we can also apply to HMRC for advance clearance, work with your lawyers to draft appropriate scheme rules and help with notification to HMRC.
If you’re interested in incentivising your key people with an EMI scheme, contact tax partner, Kate Naylor, by calling 0113 297 6825 or email firstname.lastname@example.org