Considering Enterprise Management Incentives

Team leader handshaking employee congratulating with professional achievement or promotion

After a period of some uncertainty, HMRC has confirmed that the Enterprise Management Incentive (EMI) regime remains unchanged, and recent research has served to underline the importance of the scheme.

What is an EMI?

An EMI scheme is an approved employee share scheme which allows employers to offer share options to key employees as a reward. Unlike normal share options, an EMI scheme allows both the employee and the employer to enjoy tax benefits as long as certain conditions are met.

EMIs are designed to help small, high-growth, high-risk companies which are not necessarily cash-rich but are looking to motivate and retain staff. EMIs allow employers to offer a substantial number of shares to selected employees by issuing options. With an EMI scheme, it is possible for an employee to receive shares without a tax bill arising until the shares are sold. Disposal will attract capital gains tax (CGT), but in some circumstances employees may be able to access Entrepreneurs’ Relief, reducing CGT liability to 10%.

For the employer, there is normally no national insurance contribution (NIC) charge when options are granted or exercised, or when an employee sells the shares. Employer companies also receive a corporation tax deduction broadly equal to the employee’s gains.

Firms in qualifying industries with total assets under £30 million and fewer than 250 workers are eligible. Employees must dedicate a minimum of 25 hours or 75% of their time to the business.

Qualifying conditions

To qualify, a company must:

  • exist wholly for the purpose of carrying on one or more ‘qualifying trades’. Asset-backed trades, e.g. property development, operating or managing hotels, and farming or market gardening are excluded
  • have gross assets of no more than £30 million
  • not be under the control of another company. This means that if there is a group of companies, employees must be given an option over shares in the holding company.

It is also necessary for options to be capable of being exercised within ten years of the date of grant, but there does not have to be a fixed date.

The benefits of EMIs should always be assessed within the context of overall commercial objectives. However, as well as being a great incentive for key staff, EMIs can be of special benefit to companies experiencing rapid growth, or those involved in research and development.

For further information and advice on EMIs, and whether such an option might be appropriate for you, please contact us.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

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