Enterprise Management Incentive
Research by Warwick University has found that ‘happy employees’ are 12% more productive. Whilst happiness is subjective and likely influenced by more than just work, we spend on average more than a third of our lives working so it contributes heavily on the ‘happiness’ scale. Broadly speaking employees (and people in general) feel happier when they feel valued. In employment terms this is usually demonstrated by colleagues and management showing thanks by giving a gift, a bonus or simply saying “thank you”.
A longer term and more meaningful method (for both the employee and the employer) can be to offer them shares or share options in the company: employee acquires shares at a certain value, employee increases productivity and company profitability, share value increases, the arrangement yields dividends (literally and metaphorically). Happy employee and happy employer. If the shares are offered under one of HMRC’s tax advantaged schemes this has the added benefit of tax-free growth, one of these schemes is the Enterprise Management Incentive (“EMI”).
Under an Enterprise Management Incentive scheme the company grant options to employees for them to acquire shares at a fixed price. When the employee comes to exercise the options they pay only the amount agreed at the date of grant (one would hope that this is higher) not the market value of the shares at the date of exercise. If the price is below the market value at the date of grant, an income tax charge will arise on the different between that market value and the amount paid (note this is not the market value at the date of exercise).
The company can receive a corporation tax deduction on the difference between the price paid by the employee and the market value at the date of exercise.
When the employee comes to sell their shares the ‘cost’ for capital gains tax (“CGT”) purposes is market value at the date of exercise. Any proceeds received in excess of this amount is charged to CGT although an astute employee might look to exercise their options and sell the shares in quick succession thus removing any charge to CGT.
Should CGT arise, the gain may qualify for Business Asset Disposal Relief, one of the quirks of which is that, where Enterprise Management Incentive shares are sold, the ownership period begins at the date of grant (not exercise).
Given the raft of tax benefits it is unsurprising that there are a number of strict conditions which must be met by the employee, the company, and the shares:
- The issuing company is not under the control of another company;
- If the issuing company has subsidiaries, it holds at least 51% of the shares in each subsidiary;
- The gross assets of the company (or group) do not exceed £30m;
- The company (or group) has fewer than 250 employees;
- The company carries on a commercial trade that does not consist of a qualifying trade which is conducted on a commercial basis, with a view to the realisation of profits and does not exist either wholly or substantially of carrying on excluded activities.
- the individual must spend 25 or more hours per work working for the employer, or, if less, at least 75% of the time they spend working each week must be in respect of the company; and
- they must not hold more than 30% of the shares in the company.
- must be granted by written agreement and must consist of fully paid-up ordinary shares that cannot be redeemed.
- must be granted for commercial reasons in order to recruit or retain an employee in the company and must not be issued as part of a scheme or arrangement, the main purpose (or one of the main purposes) of which is to obtain a tax advantage;
- at the time of grant the employee must not hold more than £250,000 of unexercised Enterprise Management Incentive options; and
- at the time of grant the company must not have more than £3m of unexercised Enterprise Management Incentive options in issue.
In addition to the above the company will need to obtain advanced clearance from HMRC and should also seek to obtain a formal valuation of the shares to prevent challenge from HMRC. It is therefore highly advisable that a suitably qualified professional is appointed in advance of any transactions being undertaken.
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To read a previous articles on Enterprise Management Incentive