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Enterprise Management Incentive – A Tool for Retaining Key Staff

It is essential for businesses to be able to attract and retain key members of staff. An employee share ownership plan can help businesses achieve this, by assisting business owners to align their own objectives with that of certain employees. In addition, by both becoming mutually invested in the growth of the business, the hope is that shareholder value increases. If successful, and from a financial viewpoint, both parties will benefit through increased dividends and/or a capital sum when their shares are sold.

HMRC’s employee share scheme statistics for 2017/18 have recently been published, and they set out that there has been employee savings of approximately £800m in income tax and NIC from over 13,000 registered schemes. The total number of companies operating employee share ownership plans is increasing, with the vast majority of companies operating an Enterprise Management Incentive (EMI) scheme.

An EMI scheme is a government supported tax advantaged share option plan for the benefit of certain employees.  The scheme is open to trading companies and there is no limit on the number of employees that can participate.  There are a number of qualifying conditions which have to be met by both the employer and employee, in order for shares issued to receive HMRC’s tax favour status.  If the qualifying conditions are met this type of share option scheme can be incredibly tax efficient for both the employer and employee. The company can deduct the value of the shares at exercise less any amounts paid by the employee from the profits assessable to corporation tax.  The ongoing administration costs of the scheme are also an allowable expense for tax purposes which can be deducted from the profits assessable to corporation tax, resulting in tax savings for the company.

The terms of the share option plan can be flexible and can be drafted in such a way to meet the commercial requirements of the company.  This can be done by setting conditions whereby the employee has to achieve certain performance targets or it is conditional upon a specific event happening, i.e. a future sale.

For the employees, there is no income tax or national insurance payable on receipt of an EMI option and no further tax is due if the employee pays the market value of the shares, as agreed on the date of receipt. There is only a tax charge if the option is granted at a discount.  An advantage for employees with EMI share options is that any growth will be taxed as a capital gain and it is likely to be eligible for Entrepreneurs’ Relief at the reduced rate of tax at 10%, providing the option has been held for a minimum period of two years and all other conditions are met.

In our next article, we will discuss the key qualifying conditions for a company to be eligible to grant EMI options, and for employees to obtain tax relief.

For more information or advice on Enterprise Management Incentive Schemes, please contact our Employers Solution team.

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