In the present climate, there are an increasing number of businesses who are enquiring about cost effective ways to incentivise and retain their key employees.
Enterprise Management Incentive (EMI) Schemes
One way to do so is through a EMI Scheme, which is a tax advantaged scheme designed for small/medium sized businesses and is becoming increasingly popular in current times.
How does a EMI Scheme operate?
Employees are nominated by their employers to join the scheme and are granted an option to buy shares in a company. The option can be granted over existing shares or shares that are newly issued. The employee will pay a fixed price if they decide to exercise the option to buy shares.
If set up correctly, a EMI Scheme can be very tax efficient for both employees and the company. However, EMI options must be granted for sound commercial reasons to recruit or retain employees and not as part of an arrangement whereby the purpose is the avoidance of tax.
EMI Scheme eligibility requirements
According to the relevant EMI legislation, there are strict eligibility requirements for both the employee and the company.
Broadly, the main EMI criteria relating to an employee are:
- The individual must be an employee in the company whose shares are granted under the option or one of its qualifying subsidiaries;
- The employee cannot have a “material interest” in the company; and
- The employee must meet the criteria in The Working Time Regulations 1998.
In summary, for a company to qualify to grant EMI options, it must satisfy the following criteria:
- The company (or group) must have gross assets of less than £30 million;
- The company (or group) must have less than 250 full time employees;
- The company (or group) must carry out a “qualifying trade”;
- The company must be independent, this means that the company is not a 51% subsidiary of another company or it is not under the control of either another company or another company and any other person connected with that other company;
- The company’s subsidiaries must be qualifying subsidiaries; and
- The company or a qualifying subsidiary must have a permanent establishment in the UK.
Share restrictions of a EMI Scheme
The EMI legislation contains further restrictions in respect of the shares. In summary:
- The shares must be ordinary share capital, fully paid up and non-redeemable;
- The options may be granted under a set of scheme rules or a standalone option agreement which must contain information that complies with the legislation;
- The limit on the market value of shares (as at the grant date) that may be acquired by an employee with a company or group of companies is £250,000; and
- There is a company limit of £3 million on the total value of shares (as at the grant date) that is available under EMI options at any given time.
There are also further compliance rules and strict deadlines for notification forms that are to be submitted to HMRC.