With the economy on the rise and the working environment becoming more and more competitive it can be difficult to engage and hold onto a workforce. One increasingly popular way to reward and retain high-performing staff members is the offering of Enterprise Management Incentive (EMI) schemes. These offer tax advantageous shares in a company and are an effective way to attract and retain the best talent. Here Stephen Attree, head of the business services department at MLP Law, explains how EMIs work and the benefits they present to staff members and employers alike.
The Enterprise Management Incentive (EMI) scheme was set up in 2000 in order to help small businesses attract and retain the top talent by offering employees tax advantageous shares in the company as a reward. The scheme is intended to be a straightforward and simple way to keep hold of and incentivise high-performing staff members with financially attractive rewards for actively participating in the business.
Over the last few months, the number of companies opting to set up EMI schemes has increased, and it is becoming a favourable method of employee incentive. Compared with other incentive schemes, such as cash bonuses and healthcare benefits, EMIs are designed to fit in with company’s financial objectives.
What are the qualifying requirements?
For a share option to qualify under the EMI scheme, it must be agreed with HM Revenue and Customs (HMRC), and in order to be approved for the scheme, the employee and employer must meet a variety of requirements.
Companies must meet the following requirements to qualify:
- The company must not have gross assets exceeding £30 million.
- The company must be independent and not be under the control of another company.
- The company must operate in a qualifying sector in the UK. The company must have fewer than 250 qualifying employees.
In order for employees to qualify, they must meet the following requirements:
- They must work at least 25 hours per week.
- Or if part time, 75 percent of their working time each week must be spent with the company.
What are the advantages for employers and employees?
So perhaps the most important area to address is how share options benefit the employee and how employers can use the scheme to reward and motivate their staff members. One of the main advantages of the scheme is that it is discretionary and does not need to be offered to all employees within the company. It’s a good way of getting prospective employees involved in the business and its future so that they can see the positive impact of their work and encourage loyalty and at the stage of granting shares, the company hasn’t actually given any away yet. This is because the employer can determine at which point the staff member can exercise their shares by linking it to certain events such as the time served at the company, when the turnover increases or when they hit set targets. This will encourage staff members to work hard and help the company to succeed and grow as they will directly benefit if the price of shares at market value rises.
How is take paid on the shares?
Furthermore, tax incentives are available to those employees who acquire shares and also for the employer who can claim corporation tax relief. When an EMI option is granted or exercised, no tax is usually paid. The employee will be subject to capital gains tax, but not income tax or national insurance (provided that they exercise within the rules of EMIs), when they come to sell their shares.
For example, when an employee is awarded shares, these will be granted at the current market price that has been agreed between the employer and HMRC.
Later on when the employee comes to exercise their shares, they will be able to buy them at the agreed market price when they were granted and will then be able to sell them at the current market price. If the current market price has increased at the time of exercise, then the employee will not be subject to income tax or national insurance on the uplift in value of the shares. At the point of exercise, the company can claim a reduction in corporation tax equalling the difference between the amount paid for the shares at exercise and the current market value.
Engaging and retaining the top talent can be a difficult feat for many companies in an increasingly competitive job market. Employees are more likely to be loyal to a company and dedicate a lot of time to their work if they feel valued and their achievements are recognised and rewarded. Companies will attract high performing staff members if they offer attractive benefits and incentives. EMI schemes are an effective way of encouraging the employee to feel more involved and integrated within the business, whilst also showing that their hard work is valued. The scheme is mutually beneficial for both employer and employee, so it’s easy to see why it’s becoming one of the most favourable employee benefit schemes.