The UK job market has been rocked by recent events, but demand for highly talented experts is still high, which is why it is important that businesses are able to retain these staff members.
To maintain an effective workforce, businesses need to recognised and reward talented individuals within their team.
However, with many businesses experiencing issues with cash flow and cost management due to the current state of the economy it may not be as simple as increasing a person’s salary or benefits.
Many businesses are looking for another way of remunerating their staff members that does not harm cash flow or significantly increase the tax bill of the company or the individual.
An Enterprise Management Incentive (EMI) scheme is one such way that a business can reward success in a tax-efficient manner.
The EMI scheme is a Government-approved, tax-advantageous share option scheme that is predominantly used by small to mid-sized UK businesses looking to share the financial success of the company with its team.
Share option schemes offer a lot of flexibility to reward team members that can help to drive productivity and retain key workers within a business.
Put simply, EMI option schemes allow businesses to:
- Attract and retain the best employees.
- Provide employees with a sense of ownership of a business.
- Benefit from a more productive, incentivised and committed workforce.
- Increase remuneration in a tax-efficient manner.
The tax advantages of an EMI scheme
When a company establishes a scheme, it selects employees and gives them the option of acquiring shares over a prescribed period, subject to qualifying conditions being met.
This brings with it the following tax benefits:
- There is no Income Tax or National Insurance charge on the exercise of an EMI option for an individual as long as it was initially granted at market value.
- Where the shares increase in value between the time of grant and when the options are exercised, the uplift is not charged to Income Tax or National Insurance.
- There will be a Capital Gains Tax (CGT) charge when the employee disposes of their shares if the sale price exceeds the value per share at the time of granting the options – CGT is at a lower rate than Income Tax.
An employee may qualify for Business Asset Disposal Relief on up to £1 million of Capital Gains and pay Capital Gains Tax at a fixed rate of 10 per cent if the following conditions are met:
- The option was granted at least two years before disposal of shares;
- The company was a trading company or holding company of a trading group for the two years immediately before disposal;
- The employee is still working for the company when the shares are sold.
There is no requirement for the employee to hold five per cent of the share capital of the company for Business Asset Disposal Relief purposes, providing the option is exercised within 10 days of the cessation of employment.
However, all of these tax-advantages may be lost if the company:
- Fails to establish its EMI scheme within the terms of the legislation;
- Does not notify HM Revenue & Customs (HMRC) within 92 days of the grant of an EMI option, or
- A disqualifying event occurs and option holders fail to exercise their share options within 90 days.
It is important, therefore, that directors seek advice beforehand to ensure that the scheme that they establish qualifies and that the exercising of shares is conducted properly.
Who can utilise this tax-efficient scheme?
A business can utilise an EMI scheme if it meets various conditions including the following:
- 249 or fewer employees.
- Gross Assets of less than £30 million.
- Not majority-owned or controlled by another company.
- Having a UK permanent establishment.
- Be a qualifying trading company or holding company of a trading group.
- Have qualifying subsidiaries if it is a holding company.
- Not in an excluded industry (banking, farming, property development, provision of legal services, shipbuilding, or leasing.)
- There is also a £3 million limit to the total value of share options held by all employees.
Employees must also meet certain eligibility criteria to obtain shares, which include:
- Work at least 25 hours per week or 75 per cent of total working time as an employee of the company.
- Must not hold more than 30 per cent of the company’s shares.
- Cannot hold share options worth more than £250,000 at the time of grant.
If you are unsure of your business’s eligibility or whether certain employees can be given shares it may be best to check beforehand with a trusted professional adviser, as failing to establish eligibility could lead to the scheme being disqualified.
That is where we can help. Our experts are ready to assist you with the creation and administration of EMI share schemes to ensure you take full advantage of the benefits on offer.
To find out more about our advice and support on tax-efficient rewards, please speak to our dedicated recruitment team.