The EMI Scheme / Enterprise Management Incentive Scheme
The EMI Scheme / Enterprise Management Incentive
The EMI scheme – also known as the Enterprise Management Incentive – was launched by the government in 2000. Its incentive is to encourage companies to promote employee share ownership with tax benefits that have been gradually improved over time since its initial launch. The EMI scheme has support across parliament as a way of boosting productivity by promoting employee participation. What makes this scheme unique is that it combines a tax benefit with share options.
Like any government scheme, there are strict rules to follow to ensure HMRC tax clearance. If you wish to take advantage of the EMI scheme, you’ll need to meet these specific requirements.
The EMI scheme can only be open to employees of your company, allowing you to utilize share options as a way of encouraging employees to join or stay with your business long-term. It brings your employees in step with other shareholders. You’ll want to consider how to structure the scheme within your existing shareholder hierarchy to give your employees the right incentives through the scheme.
How the EMI Scheme share options work
It’s important to remember that the share option agreement under the EMI Scheme is a legal contract that gives employees the right to purchase company shares. Under the EMI Scheme, your employees can purchase shares at any time in the future at a fixed price.
It’s considered relatively risk free as employees who take advantage of the EMI scheme can sell their shares for a profit if the company value skyrockets. If the shares don’t go up in value over the original fixed price, then the employees don’t lose out as there’s no requirement to purchase the shares.
The benefits of the EMI Scheme
The purpose of the EMI Scheme is to incentive your employees to stay with you long-term to help encourage growth and productivity by giving them a stake in your company. The key benefit of the EMI Scheme is that it offers a tax break for employees when they sell any shares purchased under the scheme.
Before the EMI Scheme was put in place, your employees may have to pay tax of 50% or more on any profit made by selling company shares. Under the EMI Scheme, employees are only subject to a 10% capital gains tax.
You can set up the EMI Scheme for your organisation within 5-6 weeks as the process is relatively straightforward.
Does my company qualify for the EMI Scheme?
If you’re reading this, then chances are that you’re curious about whether your company qualifies for the Enterprise Management Incentive. Most companies are eligible for the scheme, but there are a small number of categories that aren’t.
Your company will not qualify for the EMI scheme if you:
- Offer accountancy or legal services
- Provide property development
- Operate or manage nursing homes or hotels
- Operate within forestry activities, farming, or market gardening
- Receive royalties or licence fees
- Conduct banking, leasing, insurance, or other financial activities
- Deal with commodities, shares, or land
- Deal with goods in a situation that is not traditional wholesale or retail distribution
Your company must be employing less than 250 workers and be ‘independent’ – meaning that it’s not under the control of a parent company. This rule is because shares cannot be issued as EMI options for subsidiary companies. The parent company itself can offer EMI share options for subsidiaries if they are a qualifying organisation. In this scenario, the parent company must own at least 50% of the share capital and have full control of the subsidiary.
If you’re a parent company with less than 50% share capital, the situation around EMI share options is more complicated. Joint ventures don’t qualify for EMI schemes if one of the owners already operates as an EMI company.
Another rule you’ll need to know is that there’s no residency or incorporation requirement that states the company must operate from the UK, but you must have a ‘permanent establishment’, such as an office.
Which employees qualify for the EMI Scheme?
Employees who work at least 25 hours a week (or at least 75% of their paid working time) and who don’t have a “material interest” in the company will qualify for the EMI Scheme. A “material interest” includes the employee already owning more than 30% of the company’s shares.
The valuation of a company under the EMI Scheme
One of the most important steps in the EMI Scheme is agreeing on the share value of your company with HMRC as this will dictate the tax position. The valuation of your company for the EMI Scheme is not the same as the valuation for a commercial sale. It’s more beneficial for your employee if your share price is lower, meaning that they can purchase shares at a more accessible price and won’t be charged a high tax level. The last thing you want is for your company to be over-valued.
How the EMI scheme works
When shares are granted under the EMI Scheme, there’s no income tax payable. When the scheme gains HMRC clearance, only 10% income tax is payable on the profits made from a sale of EMI share options. The profit is determined as the difference between HMRC’s initial agreed valuation and the sales proceeds.
Although the EMI Scheme is flexible, the most popular option is an ‘exit only’ strategy. This strategy is where a sale takes place within 10 years of the share options being granted and is only valid if the sale takes place.
Under the ‘exit only’ scheme, employees are tied into the scheme until the shares are sold, and everyone within the company has a vested interest in boosting the profits.
Incentivised benefits for your employees under the EMI Scheme
One of the best ways to incentivise your employees is to align their interests with the long-term goals of your company. When your employees hold shares, they become a shareholder in your organization with part ownership of your company. Depending on the rights that you attach to these shares, the employee may also have a say in the running and future of your company.
Are you considering hiring a Finance Director or CFO, why not reach out today to our team for a no-obligation initial discussion? Our experienced team can help you set up an EMI scheme to incentivise your employees. We are based in Great Portland Street, London, with a presence in the Shropshire area, servicing the West Midlands with a network of Finance Directors around the UK.
