WHY ARE EMI SCHEMES OR OPTIONS USEFUL FOR A COMPANY OR GROUP?
EMI Schemes or Options are tax-advantaged share schemes that can be operated by qualifying independent trading companies with assets of £30 million or less that have a permanent establishment in the UK. EMI Schemes or Options are highly flexible and tax-efficient schemes which are designed specifically for small or medium sized businesses and can be drafted to meet the company’s individual needs and objectives. EMI Schemes or Options are granted for commercial reasons in order to recruit or retain an employee in a company and can be an immensely powerful tool to incentivise employees. Tax-advantaged share option schemes include company share option plans (CSOPs), Save As You Earn (SAYE) schemes and Enterprise Management Incentive schemes (EMIs).
WHY SHOULD YOUR COMPANY OR GROUP IMPLEMENT EMI SCHEMES OR OPTIONS?
EMI Schemes or Options are great to implement in new companies or groups where it is expected that there will be a high expected growth rate. EMI Schemes or Options may be granted at the discretion of the company or group and to some or all of the company or groups eligible employees. EMI Schemes or Options can be granted on the terms that it may be exercised in connection with a specified exit event such as a takeover or as a standalone agreement which can be exercised over a 10-year period with certain performance targets having to be satisfied by the option holder (“employee”). No income tax or National Insurance Contributions (“NICs”) are payable by either the employer or the employee where the shares are bought for the market value at the time the option is exercised. In the event that the shares are sold to the employee at a discounted price income tax and NIC’s will be payable by both the employer and employee (“option holder”), however the employer can in some instances agree in writing that the option holder be liable for the charges. In the event that an employee exercises or sells their option after two years of the option being granted the employee will have to pay Capital Gains Tax for any gain in the market value of the share. The company should be able to claim corporation tax on the relief on the same amount.
HOW DO EMI SCHEMES OR OPTIONS BENEFIT THE EMPLOYER?
Subject to the satisfaction of the relevant criteria by the company and the employee, a corporation tax deduction may be available when the EMI options are exercised. If the option was to acquire shares at their market value on the date of grant, the deduction will be for the amount of the gain on exercise, notwithstanding that the option gain benefits from income tax relief. If an EMI option was granted at a discount, relief will be given for both the amount of the discount and the amount that would have been subject to income tax in the absence of EMI relief. Relief is given in the accounting year in which the options are exercised and should be claimed by the option holder’s employing company. Prior to the Finance Act 2014, care would have to have been taken to preserve any potential corporation tax deduction on a change of control of a company, however, as of 17 July 2014, where a company would have qualified for corporation tax relief prior to the takeover, relief will be available on the exercise of share options, provided that the employee acquires shares within 90 days beginning on the date of the takeover. Assuming that the company itself is the grantor, there is no CGT payable for either the company or the employee on the grant or exercise of an EMI option. CGT may be payable where a third party, such as an individual shareholder, grants the option.
HOW DO EMI SCHEMES OR OPTIONS BENEFIT THE EMPLOYEE?
Private equity backed companies are usually heavily debt funded which can mean, at least in the early stages, that their equity value is low. They will also usually be working towards an exit in the short to medium term. This means that using shares to incentivise employees works very well as there is usually a low up-front income tax cost and the growth in the value of the shares is then taxable as capital gain on an exit. The shares issued to employees and directors of the issuing company will be ‘employment-related securities’ for the purposes of ITEPA 2003, Pt 7 and it will usually be a requirement of the private equity investor that the option holder or shareholder enters into a restricted share election at the time that they acquire the shares in order to protect any subsequent income tax or NICs charges arising in relation to them. If the shares are issued in exchange for existing shares on a buy out then in most cases the election will have no impact.
