Enterprise Management Incentive Scheme
Enterprise Management Incentive Scheme (EMI) and Form EMI40
EMI is a share scheme approved by HM Revenue and Customs (HMRC) with generous tax advantages which can be used to incentivise and retain key employees where certain conditions are met. As part of the scheme, a return must be filed with HM Revenue & Customs (HMRC) each year and, as we have stated in recent Muras Matters, if the 2014/15 form is not filed electronically by 6 July 2015 then the tax benefits of the scheme may be lost.
Benefits of EMI shares
By way of a reminder, under an EMI scheme an employer company can grant options to key employees to acquire shares, at a fixed price in the future, in a tax efficient manner. Some of the main benefits of EMI are broadly as follows, subject to conditions:
- Generally when the employee comes to sell the shares, Capital Gains Tax (CGT) will be paid on any profit rather than significantly higher rates of income tax.
- Entrepreneurs Relief (ER) may be available on the gain giving a tax rate of only 10%. In addition the normal rules to secure ER are relaxed so that a 5% minimum shareholding is not required.
- An employee should not pay any National Insurance Contribution (NIC) on the eventual sale of the shares.
- The employee is tied in to the company and may be rewarded as the company grows or in the event of a sale.
- The scheme may be set up with options only being exercisable if specific targets are met.
- The option enables shares to be acquired at a predetermined price which is beneficial to the employee if the value of the company grows. Options can also be granted at an undervalue however there are tax implications of doing so.
- The current shareholders can maintain control of the company, by granting options for only a small number of shares in the company.
- Directors can be included in the definition of employees.
- The company may be entitled to corporation tax relief if the shares are ultimately acquired at below market value.
Criteria for EMI schemes
As would be expected certain conditions apply to both the employer company and the employee in order for a scheme to qualify for the various tax reliefs. These include:
- Excluded activities – there are a number of excluded company activities such as dealing in land, property development, financial activities, leasing, legal or accountancy work, farming, hotels and care homes.
- Working time – the employee must spend at least 25 hours a week or 75% of his working time working for the company.
- Material interest – broadly, the employee cannot already own over 30% of the shares in the company.
- Maximum value – broadly, EMI shares cannot exceed £250,000 in value per employee or £3m over all employees. The shares must be in an independent trading company with gross assets of less than £30m.
How we can help
EMI shares are very flexible and tax efficient. We can advise on the different schemes available and the tax implications involved. We can help you to implement a scheme, prepare a valuation of the company, prepare forms on your behalf and liaise with HMRC.
The terms of the share options must be agreed in writing between the company and the employee and legal advice should be obtained regarding the agreement, if you do not already have a solicitor then we can assist you in finding one.
If you have any questions about EMI shares or staff incentives in general then please contact our Tax Director, Jenny Marks.
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