It goes without saying that the priorities for nearly every business owner at the moment are focused on the protection of their business, its income and their employees. Many businesses are running with reduced staff with employees on furlough leave through the Government’s Coronavirus Job Retention Scheme.
We have however seen a rise in requests from clients for further information on alternative ways to retain and incentivise key employees (i.e. those who are critical to the survival and future success of a company) during this unprecedented time, when of course cash incentives such as bonuses or pay rises may not be an attractive or economically viable option for a business. A properly implemented EMI scheme can be a very effective way of retaining and incentivising key employees as an alternative to cash rewards.
What is an EMI Scheme?
EMI stands for ‘Enterprise Management Incentive’ and they are a HMRC approved method of allowing companies to grant options to acquire shares to their employees in a tax efficient way. Ordinarily, if a company gives shares (or options for shares) to an employee then income tax and NIC liabilities will arise on the grant and exercise of the option. These liabilities can be significant. With a properly prepared EMI scheme however, an employee needn’t incur any tax liability on the grant or on exercise.
In broad terms, in order to qualify to grant EMIs a company must be an independent trading company with:
- Gross assets of no more than £30 million.
- Fewer than 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 a week (or, if less, 75% of their working time).
- The employee must not be associated with an individual who has a material interest in the company.
How can this help during the Pandemic?
An EMI scheme is attractive to many companies as the exercise conditions can be tailored to meet the specific needs of the company. Exercise conditions are often linked to the financial performance of the company, the performance of the employee and/or the company’s eventual sale.
Exit only EMI schemes (i.e. which can only be exercised on a sale of the company) may be a particularly attractive incentivisation choice for companies at the moment as they allow an employer to give a “notional stake” to their key employees without giving away dividend rights, voting rights or control.
During the current pandemic, there is a clear benefit in that cash (which is a precious resource at the best of times) can be retained and employees still incentivised to promote the success and profitability of the company.
Additionally, because of the pandemic, share valuations may be lower at the moment, meaning the employee will actually see a greater rise in the value of their share options than might be usual.
How can BHW help?
As mentioned, EMI schemes are an effective and popular way of promoting the future success of a company by retaining and incentivising key employees. This may be especially important at the moment, when key individuals are going to be instrumental in helping companies trade through this difficult time. To re-cap and as mentioned above, this is actually a great time to consider introducing an EMI scheme due to their relatively low set up cost (compared to the usual cash incentives), the tax advantages they can bring and the fact that share valuations are likely be particularly low at the moment.
Should you like some further information on EMI schemes and how best to incentivise your employees during this period, please contact Alex Clifton on 0116 281 6232 and at firstname.lastname@example.org.