Incentivising Employees – What’s an EMI Scheme?

An Enterprise Management Incentive (EMI) scheme is an example of a tax-efficient employee share scheme. Qualifying employees of a company can be granted share options potentially without giving rise to income tax charges on the shares (which may otherwise happen with certain employment benefits in kind).

The life cycle of an EMI can be roughly broken down into three stages: (1) the grant of the EMI option to the employee(s), (2) the exercise of the option by the employee(s) which converts the option into actual shares in the company, and (3) the subsequent sale of those shares.

Ordinarily, if a company gives shares or options for shares to an employee, income tax and NIC liabilities will arise on the issue of the shares or the grant and exercise of the option. These liabilities can be significant.

With a properly prepared EMI scheme however, the employee shouldn’t incur any tax liability on the grant of the option or on its exercise. When the shares are sold, capital gains tax will be payable on any increase in the value of those shares above their market value on the date the option was granted.

An EMI scheme will usually include conditions on the exercise of the options, which can be tailored to the circumstances of the company. Typically, the exercise conditions are linked to either the sale of the company (an “exit only EMI scheme”), allowing the employee to receive a portion of the purchase price paid by the buyer, or the financial performance of the company (e.g. a sustained level of turnover or profit).

Exit only EMI schemes can be attractive to owner-managed businesses as the employees participating in the EMI scheme are not required to be given shares (together with all the rights which attach to those shares) until the company is sold. This means employees can be given a “notional stake” in the company without giving away voting rights and dividends in the meantime.

In broad terms, to qualify to grant EMIs, a company must be an independent trading company with:

• Gross assets of no more than £30 million.
• Fewer than the equivalent of 250 full-time employees.
• A qualifying trading activity.

For employees to be eligible to be granted an EMI option, they must work for the company for at least 25 hours per week (or, if less, 75% of their working time) and not have, or be associated with someone who has, a material interest in the company granting the EMI.

Overall, EMIs are a popular and tax efficient way of incentivising employees. The rules surrounding EMIs are, however, very complex and professional advice should always be sought before putting an EMI scheme in place.

BHW’s Corporate & Commercial department regularly advises on EMIs and other forms of employee share schemes. If you would like advice in relation to a share scheme, please contact the Corporate & Commercial department by emailing info@bhwsolicitors.com or by calling 0116 289 7000.