Enterprise Management Incentives

Has your company missed out on EMI too?

Posted on July 1, 2013 by Incentivising your team Tax N2K 0

Screen Shot 2013-07-01 at 20.00.45Enterprise Management Incentive share option schemes (or ‘EMI’ for short) have long been a useful tool for entrepreneurial fast growing companies that wish to both tie-in key employees and incentivise them tax efficiently with the promise of jam tomorrow in the form of a slice of the share equity.

The peculiar thing as evidenced from the chart above is the apparent lack of take-up by start-ups and SMEs – even ignoring the flat-lining in recent years which could be attributed to the general market malay – in that only approx 7,500 companies have an EMI scheme across the entire UK…! Which begs the question:

Is your company missing out on an EMI share option scheme?

Before going any further, its worth having a brief recap on the key tax benefits of an EMI share option scheme for qualifying companies:

  • No income tax or NIC cost on grant or exercise of the EMI options
  • Growth in shares under EMI option subject to capital gains tax (CGT) rather than dreaded income tax (45% anyone?!)
  • Potential for Entrepreneur’s Relief for EMI option holders even though they may ultimately hold less than the normal required 5% shareholding plus the 12 months accruing from grant of the share option (a MASSIVE recent change)
  •  Corporation tax deduction for the company on exit in most cases.

Admittedly the entrepreneur’s relief relaxations (which I have long banged on about!) are fairly recent changes; but still, the benefits are plain to see, compared to say unapproved share options which normally have income tax and NIC written all over them…!!!

Let’s not forget that for cash-strapped start-ups and early stage companies, the ability to give highly valued employees a stake in the company with no cost outlay is a huge deal especially in the current economic climate – also, note how the company can get a tax deduction (on the increase in value between the exercise price and market value) even though the company has not incurred an expense as such!

There is also flexibility as to how and when employees can exercise the EMI share options  e.g. with some being structured as ‘exit only’ options (ie the EMI options vest only minutes before a sale of the company) and /or performance criteria can be included to keep the relevant employees on their toes!

So why poor take up for EMI share schemes in the UK?

Here’s my take from experience of talking to entrepreneurs about structuring tax efficient employee remuneration planning and EMI’s in particular:

  1. Unawareness of the scheme – sad but true, many accountants have not advised their clients that such a mechanism exists to incentivise their employees tax efficiently for both themselves and the employing company. 
  2. Too complex & costly – this is normally a misconception. Okay, the rules can be cumbersome in parts and there are some strict eligibility requirements but if you work with advisers who have implemented EMI option schemes before, this should be a problem. The costs should be far outweighed by the savings – oh, and  our professional costs for setting up EMIs are tax deductible!
  3. Bad experience in a ‘previous life’ – this can be an issue where unrealistic expectations are set when the option scheme is set-up and things don’t materialise as expected e.g. no exit occurs within the expected time-frame or if it does, the gains for the EMI optionholders turn out to be fairly paltry compared to the vision painted at the outset. Sometimes the very employees who suffered at the hands of a badly communicated EMI scheme set-up are now at the helm of their own company and are understandably fearful of inflicting the same disappointment on their own team. Managed well, this should not be an issue but it does come up…
  4. No clear exit plan – EMI’s are designed for entrepreneurial fast growing companies and, although a company can’t have an immediate sale on the cards when it sets up the scheme, it needs to have a time-frame and clear action plan for how it will allow its employees to realise the value they hold in the paper that will turn into shares. Like point 3, we’re down to managing expectations…

What’s your experience of EMI option schemes (good and bad)?

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EMI share option employee limit goes up to £250,000

Posted on May 30, 2012 by Incentivising your team 0

Enterprise Management Incentive Schemes (EMI) are a great way of tax efficiently tying in and incentivising key employees within a fast growth SME company.

One of the limitations on EMI schemes has been that each employee could only receive entitlement to shares worth up to £120,000. This is all set to change with effect from 16 June 2012 when this limit goes up to £250,000.

It is good to see the Government supporting schemes like EMI that allow employees to share in the potentially significant equity growth of their employer company.

 

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10 Benefits of an EMI Option Scheme for Your Business

Posted on May 24, 2012 by Incentivising your team 0

I have just set up an Enterprise Management Incentive (EMI) Option Scheme for a (very happy) client and I have a number of others to set up over the coming weeks.

At a time when cash is tight, EMI option schemes are a cost effective and tax efficient way of incentivising key employees.

Here are just 10 reasons why I believe EMI incentives are a great way of incentivising key management:

  1. Employees feel valued as they may one day be shareholders in the business
  2. Employees feel like they’ve received a potentially lucrative bonus (but there is no cash outflow for you)
  3. Employees will start to treat the business like its their own – suddenly downtime and frivolous paper-clip fetishes are a thing of the past as such issues are chipping away at “their” capital growth!
  4. Employees are less likely to leave (as you will no doubt have built in provisions such that the share options lapse if they leave)
  5. Employees can have performance milestones built into the EMI scheme such that they can receive further share options if they do the right things in the business
  6. There is no tax suffered by the employee or employer on the grant of a share option
  7. You can agree in advance the market value of the shares at the date of grant with HM Revenue & Customs so that the employees can have certainty about their personal tax position
  8. Growth in shares under EMI are subject to more favourable capital gains tax rates
  9. Your company should receive a tax deduction on the difference between the market value of the shares at the point of sale and the exercise price
  10. You can structure the EMI options as ‘Exit Only’ such that the employees can only ever get their hands on the shares in the fleeting seconds before a sale of the company – so they can share in the upside of a share sale without hanging around the boardroom seeking to exercise their shareholder rights (albeit that they might only hold a handful of shares!) in the meantime.

Remember, the earlier you set up an EMI scheme the better as you can then peg the HMRC agreed exercise price down as low as possible before the company builds up in value over time.

EIS and EMI – Whaaaat?!!!

Posted on March 10, 2011 by Tax N2K 0

I don’t know if there’s something in the water around here right now but I seem to spending a huge proportion of my time advising clients on either:

  • the benefits (and potential pitfalls!) of the Enterprise Investment Scheme (EIS) aimed at tax efficient investments into fledgling fast growth companies and
  • rewarding employees under an approved HMRC tax efficient share option scheme called the Enterprise Management Incentive Scheme (EMI)

I will follow up with a more detailed analysis of the pros and cons of these UK statutory tax reliefs in future posts.

In the meantime, you know where I am if these are already on your agenda and you need some help.

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