Should I consider an Enterprise Management Incentive (EMI) Scheme?

Just like hearts, good employees can be hard to find.

If your goal is to continue to grow your business, then finding and retaining great employees can be a vital component to your success.

There are several ways to reward employee engagement and loyalty including pay rises, bonuses, promotions and additional training. However, you may find that these have a short-term impact and will not dissuade your employees from seeking alternative opportunities elsewhere.

So, if you are looking for a longer-term motivation tool then you may wish to consider an EMI scheme.

What is an Enterprise Management Incentive (EMI) Scheme?

An EMI scheme is a share option agreement where you can give your employees the legal right to buy your company’s shares at some point in the future, but at a price that you fix today.

This acts as an effective long-term motivational tool because it provides your employees, or potential employees, with an opportunity to be a shareholder in your business as well as benefit from the ongoing growth of your company.

In return for the shares, you would hope that the employees would gain an increased sense of loyalty to your company. This could be shown by refraining from changing jobs, improving performance or sticking with you if you company operates within a risky industry or is undergoing a substantial period of change.

Can any employee, or potential employee, join the scheme?

Your employees will qualify for the scheme providing they work for you at least 25 hours a week or 75% of their working time, should they have other employment or self-employment work elsewhere.

In addition to the above, the employee will also fail to qualify for the scheme if they already own more than 30% of the shares in your company.

Do I need to give my employees shares immediately?

You can structure your EMI scheme, so you can choose when your employees are able to obtain their shares. This could be immediately, or they could be accrued over time and linked to performance or length of service. They can even be held off until you decide to sell the business.

In most instances however, it is recommended to include a clause for the employee to automatically lose their option to the shares should they decide to leave your company.

What are the tax benefits of a EMI scheme?

One of the main tax benefits of the EMI scheme is that your employees will not have to pay the income tax that would normally be charged on the sale of the shares; which can be up to 45%. Instead, any potential profit is treated as a capital gain; therefore, utilising their capital gain exemption allowance, and taxed at the entrepreneurs’ relief rate which is currently 10%.

For your company, the costs associated with setting up the scheme and the net value of the shares given to your employees, are both deemed a tax-deductible expense so will reduce your corporation tax liability.

Can anyone set up an EMI scheme?

There are a couple of qualifying criteria to setting up an EMI scheme.

Firstly, the gross assets within your company cannot exceed £30 million and you must have less 250 employees.

Secondly, your company must be independent so not under the control of another company.

Thirdly, certain trades are excluded so if your company works within banking, insurance, legal or accountancy services, property development, operating or managing hotels or nursing homes, leasing or licencing then you cannot set up a scheme.

Can I set up an EMI scheme myself?

Although it is possible, due to the complex nature of the EMI scheme, we recommend engaging the services of a professional with experience in this area.

If the EMI scheme is set up incorrectly then it will become invalid and the tax benefits would be lost. You could also end up offering shares to non-key employees or those who have left your company. As the goal is to retain key employees, it is vital that this stage is implemented correctly.

There is also an annual report attached to the scheme that needs to be promptly submitted to HMRC at the end of each tax year. The initial value of the shares will also need to be approved by HMRC.

So, whilst this is a hugely beneficial scheme, there are several trips and tricks, so it’s worth making the initial investment to ensure everything is set up correctly.

If an Enterprise Management Incentive scheme sounds like something you’d like to consider with your company, please feel free to contact us to find out more.