2020/21 update: HMRC has confirmed that the EU Commission’s decision on the EMI Scheme will continue to apply until at least the end of the Brexit transition period on 31 January.
If one of your main business concerns is how to attract and retain skilled employees when you are unable to offer the most competitive salary, then you may want to consider creating an Enterprise Management Incentive (EMI) scheme. The EMI scheme is just one out of a few government approved schemes which aims to support businesses by allowing them and their employees to benefit from receiving, buying or selling company shares in a tax-advantageous way.
How does the EMI scheme work?
- A business can offer an employee an EMI share option to purchase shareholdings in the company for its market value at the set time that the share agreement has been created and offered.
- The employee can choose to take up the offer of buying the shares (referred to as ‘exercising the option’) at a later date, usually once they are eligible where conditions have been set.
- If the employee decides to exercise their share option and the shares have increased in value since the initial agreement offer, they need only pay the amount agreed at the time the share option was given.
In practice this may mean that shares worth £1,000 at the time of the offer could be worth £3,000 at the date where the employee chooses to purchase the shares and they would still only have to pay £1,000.
- When the employee sells the shares and makes a profit they will only need to pay capital gains tax (charged at 10% for any value within the basic income tax band and 20% for anything over).
How are EMI shares different from unapproved shares?
Unapproved shares are any shares which do not fall into an approved government scheme. An example of unapproved shares could be those you buy from the stock market as an investment. They are different from EMI shares as they do not retain the same tax advantage as approved shares. In practice, this is how tax liabilities could affect you from acquiring unapproved shares:
- A business can offer an employee an unapproved share option which is valued at £1,000
- The employee decides to exercise the share option at a future date when the shares are worth £3,000 but still only has to pay £1,000
- Once the shares have been acquired by the employee, it is seen that they have received taxable earnings of £2,000 (the difference between the value of the shares and what the employee has had to pay for them) which the employee will be required to pay income tax on, even though they are not receiving physical cash such as a paid salary
- When the employee sells the shares and makes a profit they will be required to pay capital gains tax, the same as the scenario above with EMI shares
- The difference is that the employee is required to pay income tax on the value of the shares and does not benefit in any way until once the shares are sold, and only if sold at a profit.
How do EMI shares benefit the employee and employer?
For the employee, one of the main tax benefits is that there is no income tax to pay on exercising the share option. For the employer, it is a useful tool to use in order to recruit and retain staff as the share option can stipulate that the employee must be employed for a set number of years before they are able to exercise the option (also known as the ‘vesting period’). The company will also be able to benefit from a corporation tax deduction when an employee exercises their share option, as the excess of the market value of the shares over the price paid by the employee is an expense to the company. Overall EMI shares are seen as mutually beneficial as the better the company performs, both employer and employee reap the rewards.
How can a company set up an EMI share option?
To set up an EMI scheme you must first be eligible by meeting qualifying conditions:
- The company can employ no more than 249 members of staff
- It must have assets of less than £30 million
- The company cannot be controlled by another company
- The company must not be from an excluded industry
Only certain employees are eligible to receive EMI share options:
- The employee must work for at least 25 hours per week or spend 75% of their total working time as an employee of the company
- They cannot hold more than 30% of the company’s shares
- They cannot hold share options worth more than £250,000 (at the time of granting the option)
Once you have established that both parties are eligible, the owner of the company will be able to create the scheme and file with HMRC to receive a valuation. When the valuation has been agreed upon you need to authorise your employee share pool and receive approval from your board and other shareholders. Options may then be granted once this step has been completed. The business must register the EMI scheme option and those who are in receipt of the option with HMRC within 92 days of the first option grant.
What is the difference between granting a share option and shares?
A share option is merely the offer that an employee can choose to buy the shares if they wish at a future date. Share options can be granted with certain stipulations such as setting out the maximum amount of shares an employee can buy, when they can buy this (e.g. only once they have met a target or only once they have been employed for 3 years etc) and how much they would have to pay for the shares.
The alternative, which may be suitable depending on individual circumstance, is for the employee to purchase the shares right from the beginning of their employment. It is important that they purchase the shares and are not gifted them or receive them at less than market value or they could incur additional tax liabilities.
Our EMI service and how we can help
EMI schemes require ongoing management past the initial set up with HMRC. We’re here to help at every step of the way.
- Initial advice and guidance as to whether the EMI scheme is suitable for your business
- Help designing your EMI scheme so that it aligns with your business goals
- Filing your EMI scheme with HMRC and assist with share valuation (whilst we do not complete the valuation work ourselves we are happy to recommend our trusted partners and handle the process seamlessly for you)
- Prepare board minutes and necessary shareholder resolutions to allow for EMI options to be granted
- Complete necessary filings at Companies House
- Report EMI option grants to HMRC as and when required
- Prepare and file annual EMI option scheme returns
- Advise on procedures for EMI option exercise and accounting for tax