If you are struggling to attract and retain employees, you should consider an Enterprise Management Incentive (EMI).
An EMI scheme gives employees the option to purchase shares within the company. The employees buy shares at the market value on options that are first offered (grant), giving the opportunity for the employee to profit from any growth in the company. The option must be exercised within 10 years in order to receive tax advantages.
You can read more about Enterprise Management Incentives; the qualifying conditions and benefits here.
Terms and Conditions for EMIs
No PAYE/ NIC when shares are granted.
If shares are exercised after 10 years from grant of option
PAYE will be operated on the market value at date of exercise less cost of shares to employee. Class 1 NIC will only be payable if the shares are readily convertible assets (usually listed shares or unlisted shares if a buyer is in place).
If shares are exercised within 10 years from grant of option
No PAYE/ NIC payable provided that the option shares were not sold at a discount.
If the shares had been discounted, PAYE will be operated on the lower of MV at date of exercise or date of grant, less the cost of the shares.
When shares are sold
Capital Gains Tax will be payable on disposal of the shares. Income tax paid on exercise (if any) will be an allowable deduction.
Entrepreneurs’ relief (a reduced rate of Capital Gains Tax)
Available if the following conditions are met:
- Shares have been held for at least 1 year starting from the date of grant
- The company was a ‘trading company’; and
- Was an officer or employee of the company
There are different rules where shares were exercised on or after 6 April 2013 and were exercised within 10 years.
Tax Charges from disqualifying events
The below will mean that a company no longer qualifies for EMI:
- A loss of independence
- Company no longer meets the trading requirements
- Employee no longer works for company
- Employee no longer works the required hours
- Employee has exceeded the share value limit (£250,000)
If the shares are exercised within 90 days from the disqualifying event
No tax is charged if this is within the 10 year period from date of grant and the shares were not sold at a discount.
If the shares are exercised after 90 days from the disqualifying event
PAYE/ NIC will apply on the increased value between date exercised and disqualifying event.
- Check the articles of association:
- ensure that the operation of the EMI scheme is permitted
- can new classes of shares be issued
- whether shares can be restricted for rights to dividends
- needs to be passed by a special resolution (a 75% majority)
- record details in the minutes
- filed to Companies House within 15 days of amendments taking effect
- Carry out a company valuation to ensure that the exercise price is of a true value
- Valuation will need to be approved by HMRC by completing a VAL231 form
- Once agreed, employees will need to be provided with an ‘option agreement’, approved by the board. Important to take minutes at this point as well.
- Notify HMRC within 92 days of the grant of an EMI option in order for it to qualify under EMI
- Each tax year an annual return will need to be submitted online by 6 July following the end of the tax year
- Instructions must be provided to an employee on how and when the shares can be exercised and how to carry this out
For further information and advice on EMIs, please contact Barry Soraff at firstname.lastname@example.org.