Covid-19 has wreaked havoc on the UK and global economies, taking £millions off our financial markets and reducing the value of many start-ups and SMEs but is this all bad news? This reduction in Company value can be turned into an advantage because it makes buying in to a company and issuing employee share options highly cost-effective. If you are looking at ways to incentivise staff NOW is the time to consider an EMI share option scheme.
What is an EMI scheme?
An EMI share option scheme is the most popular kind in the UK right now. EMI stands for Enterprise Management Incentive scheme and is 100% supported by the Government through the generous tax advantages it gives to both the SME’s who set them up and, the employees who take the rights to own a small percentage of the company shares. An EMI Scheme helps enormously by avoiding the need to pay higher salaries, which are often unaffordable particularly in times of economic uncertainty, to motivate, reward and ultimately keep staff.
The EMI option terms take the form of a written agreement between your employee (the option holder) and the employer company which states the main terms of the option, including how and when it may be exercised.
What are the benefits?
EMI share schemes are attractive for higher growth businesses who which wish to recruit, retain and incentivise staff, but which may not have oodles of surplus cash lying around to be able to pay higher salaries or bonuses to valued staff members.
There are several benefits of introducing an EMI share scheme, both for the employer and employee:
1. Tax
Firstly, the company benefits because it is cheaper than awarding a bonus/pay rise to the member of staff (there will normally be no National Insurance contributions to pay through the EMI scheme). There is also a corporation tax benefit in that the costs of the scheme can be offset as tax deductible.
Secondly, the employee benefits because there is a limited income tax liability for both the exercise of the option (to convert it into real shares) and then upon a sale of the Company or the employee’s shares, there is an attractive 10% discount to the current 20% CGT rate, because of the applicability of entrepreneur’s relief to EMI share schemes.
2. Staff retention and reward
The scheme is the perfect opportunity to align employee’s interests with the business. Employee’s who have a vested interest in the success of the company are more likely to be motivated and will give more to the business
The scheme can be used to reward and thank high performing employees without the need to offer high salaries and cash bonuses whilst making them feeling highly valued and ‘integrated’ into the company.
Are they available to every business?
EMI schemes are approved by HM Revenue and Customs (“HMRC”) so there are various conditions that must be met by the employer company, the employee and the options themselves. Get in touch to see if you are eligible.
*Worth noting that you will likely need accountant to produce and agree an accurate valuation for your Company and relay details of your valuation and option scheme to HMRC (to be certain your EMI Scheme will be approved).
