For many small businesses, the key to success lies with their people – finding & retaining the best talent possible. In an increasingly competitive marketplace, more and more companies are turning to Enterprise Management Incentive (EMI) Schemes as a way to increase retention of key staff, by offering them the opportunity to invest in your company.
How they work
EMI Schemes are an HMRC tax-approved scheme that allows a company to grant share options to selected employees, which means that they have the right to purchase these shares at an agreed price at some point in the future. Sometimes the options are exercised when the business is sold. In which case, the employee buys the shares and sells them on the same day, pocketing the difference between the agreed price and the final sale price, and doing so in a very tax-efficient way.
The tax benefits
There is no immediate charge to income tax on the employee, so they can be granted these options without any initial tax liability. If the option price is at the market price of the shares at the point they were granted, there will be no tax to pay when the shares are purchased either – even if the market value at the time of exercise is higher. If the shares are then sold at that point, or at some point in the future, the employee would be subject to capital gains tax on the profit between the option price and the sale price. The costs of setting up and administering the EMI Scheme will be an allowable expense of the business, attracting corporation tax relief.
There are limits associated with EMI schemes. The total value of the options granted cannot exceed £3m and the options granted to each employee cannot exceed £250,000. There are also rules around which companies and employees are eligible for EMI schemes – please get in touch if you’d like more information.
It is important to value the company at the point at which the share options are granted, as this will determine the market value of the options. This will also be used to support the validity of the scheme with HMRC.
We can complete the initial valuation of the company for you and then devise a share option scheme that is right for your business and your key employees. We will then work with a solicitor to get all of the relevant documentation drawn up. Whilst these schemes tend to be the most straightforward ones to implement and are ideal for small businesses, you do need to ensure that everything is done correctly to protect the business, and so as not to land you or your employees with any unexpected tax liabilities.
You can expect to pay between £5,000 – £10,000 for the setup of an EMI Scheme, depending on the size & complexity of the business & required scheme. This fee includes the company valuation and all legal documentation & agreements (drafted by solicitors). Clients that have been through the process often point out that this cost is much less than the recruitment fee they’d pay if a key employee left, not to mention the disruption that this would cause. It actually works out a highly cost-effective way of retaining key people, as you can include a provision that means that the share options are only valid whilst that person is an employee of the business.
Would you like to know more?
If you’d like to chat to Wow’s EMI Scheme specialist, Katie Payne about whether your business might benefit from this, please get in touch. We’re here to help.