The past year and half has been a tough time for most of us.
This includes the UK’s army of employees, a large proportion of whom have had to adapt to new conditions such as being furloughed and/or working from home.
Thankfully many businesses have weathered the storm due to a combination of their own hard work and some help from the various government support packages and can look to the future positively once more.
As strength gradually returns to the economy and workers start to return to their offices and workplaces, now may be a particularly good time for employers to inject fresh impetus to incentivising their workforce.
Often a highly effective way of doing this is through an equity-based award. This can have the effect of tying an employee’s fortunes indirectly with that of the business they work in.
There are a wide variety of ways this can be structured but one of the most popular means is the Enterprise Management Incentive (EMI).
The EMI is a share scheme which has been approved by HMRC. To qualify, both the employee and the company must meet certain conditions. These include number of hours worked in the business by the employee and the size and nature of the business itself.
The basic idea behind the EMI is that the employee is granted options to acquire shares in the company at some future point. No tax liability arises on grant.
The options are often granted at a price equal to the current market value of the company (which normally avoids an employment tax liability crystallising at the time the shares are acquired).
To provide certainty of tax treatment, it is possible to agree the current value of the shares with HMRC before the scheme is put in place.
With options to acquire shares in the future at today’s price, if the company grows in value (which is normally the intention!), the employee is able to acquire shares at a comparatively low price.
Therefore, the more the value of the company grows, the more the EMI option holder stands to gain.
On an eventual sale of the shares, hopefully at a gain, the employee will normally be subject to capital gains tax on the gain rather than the higher levels of employment taxes.
Tax efficiency and its ability to motivate are two key features of the EMI but another one is its considerable flexibility. Some of the relevant features in this context are:
- A company can chose which employees it wishes to incentivise in this way as the EMI does not need to be made available to all staff.
- Options can be tied to performance targets to provide extra motivation if this is deemed appropriate.
- Often exercise only occurs on a sale of a company. Therefore, key employees are incentivised to stay until a successful sale but do not participate in business at shareholder level until the point the business is to be sold. This avoids the dilution of shareholdings which would result from employees acquiring shares earlier and allows the company’s owner-managers to retain control and continue to run it in the manner they see fit until an ultimate sale.
Implementing and maintaining an EMI is not an onerous process as the scheme is designed to be cost-effective and straight forward.
There are many other methods of structuring equity awards for staff (and we will cover some of these in future ‘Tax Tuesday’ pieces) but quite often the EMI is the first port of call for the owner-managed business due to its flexibility and ease of implementation.
How can we help?
For further information or to discuss your individual business needs in more detail, please do not hesitate to get in touch with your usual relationship principal or email tax@haroldsharp.co.uk.
The author takes every care in preparing material to ensure that the content is accurate and up to date. However no responsibility for loss occasioned to any person acting or refraining from acting as a result of this material or from making use of this material can be accepted by the author.