Could a tax-efficient EMI scheme boost productivity and help you retain top talent?

Enterprise Management Incentive (EMI) schemes are a popular form of employee share option plan, designed to help small and medium-sized enterprises attract and retain key talent. These schemes can offer tax advantages to both employers and employees, making them an attractive option for businesses looking to incentivise their workforce.

Overview

The primary purpose of EMI schemes is to align the interests of employees with those of the company by allowing them to acquire shares in the company at a future date, often at a pre-determined price, provided certain requirements are met. There is typically no restriction on the exercise provisions that apply, other than the option must be capable of  being exercised within 10 years of the date of the grant, and (to the extent you wish to include the provision) options can be exercised within a period of 12 years following the option holder’s death.

The most common exercise provisions that companies choose to adopt are:

• Exit only: This provision allows the option to only be exercised on an exit event, such as a share sale or listing of the company.
• Performance based: This provision ensures certain targets set by the company are met before the option is exercised.

By granting share options, companies can motivate employees to contribute to the company’s growth and success, as their personal financial gain is directly linked to the company’s performance. This alignment can lead to increased productivity, innovation, and loyalty among employees.

Benefits for Employers and Employees

Employers:

1. Attracting Talent: EMI schemes enable companies to offer competitive remuneration packages without the immediate cash outlay.
2. Retention: By tying employees’ financial rewards to the company’s success, EMI schemes encourage long-term commitment and reduce staff turnover.
3. Performance Incentives: Employees are more likely to be motivated to improve company performance when they have a personal financial interest in its success.
4. Flexibility: The number of options granted, and the conditions attached to them are completely bespoke to your company.

Employees:

1. Tax Advantages: Employees may benefit from favourable tax treatment on the gains made from EMI options. The difference between the market value of the shares at the time of exercise and the option price is subject to Capital Gains Tax rather than Income Tax, often resulting in a lower tax liability.
2. Ownership: Employees gain a sense of ownership and involvement in the company, which can enhance job satisfaction and engagement.

Eligibility Criteria

For Companies:

• The company must be independent and not a subsidiary of another company.
• Gross assets must not exceed £30 million.
• The company must have fewer than 250 full-time equivalent employees.
• The company must carry out a qualifying trade, excluding certain trades such as banking, farming, and property development.

For Employees:

• Employees must work at least 25 hours per week or, if less, at least 75% of their working time for the company.
• Employees must not hold more than 30% of the company’s shares.

Potential Drawbacks and Considerations

While EMI schemes offer numerous benefits, there are potential drawbacks and considerations:

• Complexity: Setting up and administering an EMI scheme can be complex and will require professional advice from an Accountant to ensure compliance with HMRC requirements.
• Valuation: Companies must obtain a formal valuation of their shares in order to set the option price.
• Dilution: Issuing new shares can dilute existing shareholders’ equity, which may be a concern for some shareholders.

In conclusion, EMI schemes are a powerful tool for companies to attract, retain, and motivate employees by offering them a stake in the company’s success. While there are complexities involved in setting up such schemes, the tax advantages and potential for aligning employee and company interests make them a worthwhile consideration for many businesses.