The Enterprise Management Incentive (EMI) scheme is a powerful tool for businesses in the UK, designed to attract, retain, and incentivise employees by giving them a stake in the company. For both employers and employees, EMI schemes offer significant financial and tax advantages. This guide covers everything you need to know about EMI schemes, including how they work, potential tax implications, and the benefits they bring to both parties.
What is an Enterprise Management Incentive (EMI) Scheme?
The EMI scheme is a tax-efficient share option plan available to UK companies, aiming to incentivise employees by offering them future ownership in the business. By allowing key employees to purchase shares at a pre-determined price, the scheme enables employees to benefit if the company succeeds and its value grows. For companies, an EMI scheme helps to attract top talent, increase retention, and align employee interests with the company’s success.
How Does an EMI Scheme Work?
An EMI scheme allows companies to grant share options to employees, which they can exercise at a future date if certain conditions are met, such as length of employment or performance targets. When these conditions are fulfilled, employees can buy shares at the pre-agreed price (known as the “exercise price”), potentially profiting if the market value of the shares increases.
Example: Tom and His EMI Options
Let’s consider Tom, who works for a UK-based start-up. His company issues EMI options to employees, including Lewis, who is granted an option to buy 2,000 shares at £10 each in two years if he remains employed with the company. After meeting the employment condition, he buys the shares at the exercise price of £10 each. Later, when the market value rises to £30 per share, Tom sells them for a profit of £40,000.
This example shows the potential financial benefit for employees in a successful business. Notably, it also offers significant tax savings for employees.
Tax Benefits of EMI Schemes for Employees
EMI schemes are designed to be tax-efficient. When structured correctly, they offer substantial savings across the lifecycle of the option.
Lets remain with the example of Tom above lets look at the tax in the below scenario, assuming his options meet all the qualifying conditions for EMI:
1. At the Time of Grant: Employees are granted EMI options to acquire shares at their current market value, with no income tax or National Insurance Contributions (NICs) due.
Tom was granted an EMI option which allowed him to acquire 2,000 shares with a cost of £10 each, their current market value.
No income tax/No NICs
2. At the Time of Exercise: When employees exercise their options and purchase shares, no income tax or NICs are usually due if the exercise price matches the market value at the time of grant.
After two years, Tom exercised the option to buy all the shares at £10 each.
No income tax/No NICs
3. At the Time of Sale: Upon selling the shares, employees may face Capital Gains Tax (CGT) on the profit made. However, CGT rates are generally lower than income tax rates, providing a tax-efficient way for employees to benefit financially.
Tom proceeds to immediately sell his shares for £30 each (the current market value), a £20 profit per share from his purchase price (£10). Tom has made a capital gain of £40,000 (£30-£10) x 2,000. Subject to Toms personal circumstances capital gains tax may be payable.
CGT may be charged
If your work place options are not a qualifying EMI scheme then, read our post on RSUs for more guidance (https://autuswealth.co.uk/understanding-rsus-taxation).
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Why EMI Schemes are Beneficial for Employers
Implementing an EMI scheme offers numerous benefits to employers as well:
1. Attract and Retain Talent
– The promise of equity can be a powerful draw for talented employees, providing them with a potential financial upside that aligns with the business’s success.
2. Promote a Culture of Ownership
– EMI schemes foster an ownership mentality, often leading to reduced turnover and higher levels of employee engagement.
3. Align Interests with Business Goals
– When employees have a vested interest in the company’s growth, they are more likely to work towards shared goals and contribute to long-term success.
4. Flexible Scheme Structure
– Employers can tailor EMI schemes to their needs, setting conditions around the exercise price, vesting schedule, and employee eligibility.
5. Corporation Tax Relief
– Employers may also benefit from corporation tax relief when employees acquire shares. This relief equals the difference between the market value at exercise and the exercise price, reducing overall corporate tax liability.
Important Considerations and Limitations
While EMI schemes offer attractive benefits, they also come with limitations and qualifying conditions:
1. Risks of Depreciation
– If the company’s value decreases, employees may not profit from their shares, impacting the scheme’s effectiveness as an incentive.
2. Eligibility Requirements
– Not every business qualifies for an EMI scheme. Eligible companies must meet criteria such as having fewer than 250 employees and gross assets under £30 million. Additionally, the company cannot be majority-owned by another entity or engaged in “excluded activities” like banking or property investment.
3. Employee Eligibility
– To qualify, employees must work at least 25 hours per week or spend 75% of their working time with the company. They also must not hold a “material interest” (i.e., more than 30% of the company’s shares).
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Qualifying Conditions for EMI Tax Benefits
To benefit from EMI tax advantages, both companies and employees must meet specific conditions:
For Companies
– Must have a permanent establishment in the UK.
– Shouldn’t be majority-owned by another entity.
– Must operate within specific industries, excluding banking, farming, and a few others.
For Employees
– Employees should not hold more than 30% of the company’s shares before the EMI options are granted.
– They must work a minimum of 25 hours per week or 75% of their working time for the company.
Ensuring that these conditions are met can be complex, and non-compliance may disqualify participants from tax benefits. Companies should carefully monitor the scheme’s administration and communicate with HMRC if any changes arise.
For full details on qualifying conditions please check the government website here (ETASSUM52080 – Enterprise Management Incentives (EMI): Qualifying companies: Trading activities & UK permanent establishment requirement – HMRC internal manual – GOV.UK (www.gov.uk)).
Disqualifying Events
Several events can disqualify EMI options from receiving beneficial tax treatment. These may include:
– The company being acquired or coming under the control of another company.
– The company no longer meeting trading activities requirements.
– Changes to the employee’s eligibility, such as reduced working hours.
If disqualifying events occur, companies must notify HMRC to avoid unexpected tax liabilities for participants. For further assistance, please read the HMRC website for more info (ETASSUM57080 – Enterprise Management Incentives (EMI): Taxation of EMI options: Disqualifying events relating to the relevant company – HMRC internal manual – GOV.UK (www.gov.uk)).
Conclusion: Are EMI Schemes Worth It?
EMI schemes offer unique advantages for both employers and employees, providing a mutually beneficial arrangement that enhances employee engagement and rewards. For employees, EMI options are a tax-efficient way to share in the company’s success, potentially building wealth in the process. For employers, an EMI scheme is a valuable tool to attract, retain, and motivate top talent while also benefiting from corporation tax relief.
The key to a successful EMI scheme lies in ensuring compliance with eligibility requirements and understanding the potential tax implications. With careful planning and administration, EMI schemes can be an effective part of a company’s long-term strategy for growth and employee loyalty.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
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