EMI Schemes – A great way for a business to incentivise and retain key personnel

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In developing a company’s business, it is often important to retain key employees, which can lead to the question of incentivisation and to the possibility of share ownership.

For the business owner, offering shares to employees can itself be an issue – How does this affect dividends? What if the employee leaves?

For the employee there is potentially a tax issue as the value of any shares received from an employer is a taxable benefit under PAYE.

While the employment package will be part of the answer to incentivisation, Enterprise Management Incentive (‘EMI’) schemes provide a very useful additional way of encouraging key personnel to stay with a company.

EMI Schemes were introduced by legislation in 2003 so they are fully recognised in English law and for tax purposes.  Under an EMI Scheme, an employee is granted an option to buy a specific number of shares at a future date but at the current share value: if the company’s business is growing, this should be an attractive benefit.

Usually the option is only exercisable when the company is sold. If the employee leaves the company’s employment before then, the option to buy shares will lapse and be cancelled.

In this way, the employee won’t hold any shares until the company is sold, but can obtain a specified number of shares immediately beforehand and benefit from the sale – potentially a significant incentive to stay with the company and to support its growth in value.

The tax advantage of EMI Schemes allows the employee to buy shares at a price based on the value of the Company when the Scheme is set up, and without that being treated as a benefit on which Income Tax must be paid.  When the employee exercises the option and sells the shares as part of the sale of the company, Capital Gains Tax would be charged on the gain but, subject to qualifying criteria, Entrepreneurs Relief may reduce the rate of CGT (currently to 10%).

If the company’s value has grown significantly, the employee will enjoy receiving part of the proceeds of its sale, and with very favourable tax treatment. Not surprisingly, EMI schemes have become increasingly popular.

Some companies cannot set up an EMI Scheme if their trading activities are excluded by the legislation, for example farming and the hotel and residential care sectors are excluded. Criteria for employees include a requirement for a minimum number of working hours. But EMI Schemes are possible for most companies, and they are well worth considering as a means of incentivising key personnel.

If you would like advice regarding EMI Schemes, please contact us to speak to a specialist solicitor in our Commercial Team.

Author: Tim Smith – Head of Commercial Department @ Griffith Smith Farrington Webb LLP

Contact us on: 01273 324041 or enquiries@griffithsmith.co.uk