What is the Enterprise Management Incentive?

Recruitment and headhunting agencies have never been more active, and more companies than ever are actively targeting and poaching experienced staff from their competitors, creating chaos within the workforce and impacting employee engagement rates.

Key staff know their value and it is often difficult to hold on to them – especially if you’re only able to offer a standard remuneration package.

If this sounds familiar, then the Enterprise Management Incentive (EMI) scheme could be the answer.

What is the EMI?

The EMI is a share scheme that enables companies to attract and retail key staff by rewarding them with equity shares in the business. The scheme is ideal for smaller, entrepreneurial companies that might not be able to match the salaries paid elsewhere.

Which companies qualify?

Companies must meet a number of criteria to qualify:

• have gross assets of no more than £30 million
• not be under the control of another company
• operate in a qualifying sector (property development, financial services, farming, hotels, nursing homes, leasing, legal and accountancy services are all excluded)

Who is an eligible employee?

On the whole, a company can select whoever they want to join the scheme, provided:

• he or she is an employee of the company, working at least 25 hours a week or, if less, 75% of their working time
• he or she does not own more than 29% of the equity in the business the express purpose of providing them with share options is to ‘retain’ or ‘recruit’ them

How many people can join?

EMIs have proved so popular that the government has recently abolished the limit on the number of employees who can be awarded share options – provided the maximum value of options doesn’t exceed £3 million in total.

There is a limit of £100,000 per individual employee and the share option must be exercisable within 10 years.

Are there any tax advantages?

As well as being an attractive staff incentive, EMIs bring several valuable tax advantages to the business and the individuals participating in the scheme.

The unapproved routeLet us assume, for example, that an employee is granted share options at a fair market value of £5 per share and exercises those rights, say, three years later when their market value has increased to £12. The ‘paper gain’ of £7 is liable to tax at 40% and an NIC surcharge of 1% even though the shares have not been sold.

That same ‘gain’ will also be subject to employers NIC of 12.8%. All the rates used are as for the tax year 2003-2004 and NICs relate to shares traded in the market or by internal corporate means.

The combined tax/NIC levy is therefore 53.8% – in a situation where no cash has been realised. Moreover, it is now possible as a condition of granting the option, to make a prior agreement that the employee undertakes to pay the employers insurance contribution as well as his own.

The EMI routeThe budget made no attempt to rectify what is a highly unsatisfactory position for unapproved options but approved share options such as EMI are subject neither to income tax nor national insurance contributions.

In the above example, options under an EMI scheme are granted under the same conditions and the ‘gain’ of £7 accrues on exercise of the option – in other words, the gain is not taxed until the shares are sold.

Importantly, the shares will qualify for taper relief from the earlier date when the option was granted and not the date the right to acquire them was exercised. A 10% capital gain rate is available on the sale only two years after the share options were granted for disposals on or after 6th April 2002.

53.8% or 10%? Which would you rather pay?

In summary Over 25,000 employees in 2,500 companies have been awarded EMI options. They are an ideal way for small businesses to recruit and retain high quality staff but it is essential you ensure your company is suitable.

Written by Michael Caden, a partner at the London office of national accountancy group Hacker Young.

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