The Enterprise Management Incentive (EMI) scheme is a tax advantaged share option scheme which is designed for SMEs.

The scheme enables companies to attract and keep key staff by rewarding them with equity participation in the business.

Therefore, Enterprise Schemes can be used to flexibly incentivise your employees.

EMI schemes are ideal for entrepreneurial SMEs that might not be able to match the salaries that other larger, more established firms can afford.

What is the point of an EMI scheme?

For SMEs where budget is key, shares or share options can be an important part of the package in attracting desirable candidates.

Somebody who sees potential for realising a significant lump sum through sale of shares may well be persuaded to join a company, even if the cash salary is less than what other larger companies are able to offer.

Employee share ownership work to align the interests of a company’s owners with that of employees.

All are looking to increase shareholder value through growing the business, in the hope that they will eventually benefit through sale of their shares or through the receipt of dividends.

What is an EMI share option?

A share option is a right to acquire shares in a company, on terms set out in an option agreement.

This agreement will specify how many shares an employee may acquire, how much he or she will have to pay for the shares, and when the shares can be acquired through exercise of the option.

Option exercise may occur dependent on a variety of factors: after a specified period of employment, upon the achievement of performance targets, or upon the sale of the company, for example.

EMI share options vs shares

In some cases, it will be sensible for employees to own shares from the outset. However, using this option, employees will have to pay for their own shares, or suffer a tax charge if their shares are gifted or bought at less than full value.

On the other hand, share options can provide more of an incentive than owning shares outright. For instance, if the share options are only exercisable upon achievement of targets or Key Performance Indicators (KPIs).

Furthermore, many companies prefer employees not to have shares from the outset, because of complications in the event of staff moving on.

Therefore, the preferred solution is generally allowing employees to have share options, rather than own shares upfront.

How are EMI share options taxed?

When share options are granted, there is no initial charge.

However, for an ‘unapproved’ share option, which is an option without the special tax benefits of EMI or other approved share plans, income tax and possibly National Insurance may be charged when the option is exercised.

Furthermore, when the shares are sold, capital gains tax may be payable on any growth in value since option exercise.

Who is entitled to receive EMI options?

EMI options can only be granted to a qualifying employee of a qualifying company.

The company must fit the following requirements:

  • Total company assets of £30 million or less
  • Offer up to a maximum of £250,000 worth of shares per employee, and a total of £3 million for the company as a whole
  • Must not be owned by another entity
  • Have fewer than 250 full-time employees
  • Share options must be exercisable within 10 years
  • Companies must also not participate in any ‘excluded activities’ to be eligible.

To be entitled to an EMI scheme, the individual involved must meet the following criteria:

  • Must work at least 25 hours per week
  • Must own less than 30% of the company

How does an EMI scheme work?

Working with professional accountancy advisers, you should first establish whether you are eligible for the scheme.

If it is found that you are, then you should decide how the EMI scheme plan will work in practice.

Key issues that crop up regarding EMI schemes include:

  • Which employees should be granted options, and over how many shares.
  • When should options be exercisable? For example, should option exercise be linked to performance targets or occur only when your company is sold.
  • What type of shares should be subject to options? For example, should they be ordinary shares, or a special share class designed for options.
  • Will the share price be discounted from market value?
  • What will happen if an option holding employee leaves your company?

Once these issues have been decided and resolved, formal EMI option agreements should be prepared. This will record and formalise all the relevant terms.

Once agreed and signed by you and your employee, the options are formally granted.

Option grants must be notified to HMRC within 92 days.

Furthermore, it is normal practice to agree the market value of shares with HMRC in advance of the options being granted.

This will provide certainty as to the tax treatment of option exercises.

Working with an established accountancy firm in Manchester to implement EMI options

To conclude, the EMI scheme is a proven incentive for employees.

It is helpful in attracting talent to your business, whilst balancing the financial priorities of individuals and companies.

Businesses that do not consider EMI options may be at a competitive disadvantage when undergoing recruitment, especially during this current period where almost all companies are struggling to recruit.

If your company has yet to implement an option plan, now is the time to consider it and Williamson & Croft are perfectly primed to assist with this.

Specialist industry knowledge and experience means our clients enjoy sound technical advice combined with our commitment to providing the highest level of client care, whilst being transparent in the way we operate.

We strive to provide a service that is reliable, responsive, and personally tailored, underpinned by a wealth of expertise and solid technical work. We take pride in being an entrepreneurial firm and we strive to offer a pragmatic and commercial approach when helping clients overcome their challenges.

As a firm, we invest in our clients as we understand that our success is reliant on theirs. This is why we go beyond the usual responsibilities of an accountancy firm, to ensure our clients have every possible chance to exceed expectations and experience high levels of success.

Contact us today to find out how we can help you.