If you are considering awarding shares to your employees, an Enterprise Management Incentive is often the best place to start.
Referred to as EMI share schemes, they are a particularly flexible way of managing the process and they are tax-efficient too.
However, like many financial structures, they have to meet certain criteria to qualify for the tax breaks. This guide takes a look at the operation of an EMI share scheme and the conditions that must be fulfilled.
EMI share schemes are approved by HMRC and were initially introduced in 2000. Since their introduction, the rules have been changed making them even more attractive.
Both the employer and the employee can enjoy the benefits of an EMI but only if they both meet their respective qualifying conditions.
Apart from their tax efficiency, one of the reasons that EMI schemes are so popular is their flexibility. Any employee can be included in an EMI share scheme but they do not have to receive shares on equal terms.
EMI schemes are usually popular with shareholders and studies suggest that companies that offer EMI schemes tend to perform better. By providing a potentially lucrative benefit, there is also the opportunity to retain key staff, thus reducing the costs of recruitment.
Although there are sets of qualifying criteria for both the employer and employee, the good news is that they are not especially onerous or exhaustive. There is not anything complicated about the rules and it is fairly simple to ascertain whether you meet the criteria.
To be eligible to participate in an EMI share scheme, employers must meet these conditions:
If your company fulfills the above criteria, you will need to check the employee eligibility:
If all of the above criteria are fulfilled, the last set of rules that must be followed relating to the share options:
As mentioned above, EMI Share Schemes provide certain tax efficiencies providing all of the qualifying criteria are met. If they do then they are approved schemes. If they do not then they are unapproved schemes.
Shares which fall within the scheme and are granted at the market value will not be subject to either Income Tax or National Insurance. Also, the company can deduct the difference in exercise price less the price paid against corporation tax.
It is recommended to ask HMRC to approve the market value of the shares before they are issued to prevent an enquiry or any unexpected liability at a later date. Once a valuation is agreed the company has 90 days (extended to 120 days during COVID restrictions) to issue the shares.
If the shares are classed as unapproved and fall outside the scheme, the difference between the market value and the amount paid will be treated as a salary or bonus. This means the figure will be liable for Income Tax and National Insurance.
When the rights are exercised, the employee will only be required to pay the pre-agreed market price. No liability will immediately fall on the difference in value. However, once the shares have been acquired, upon disposal the profits may be subject to Capital Gains Tax. The usual CGT annual exemption can be used to offset any liability.
When the rights are exercised, the employer will be able to claim a deduction in Corporation Tax. This is usually equal to the market value at the date the option was exercised minus the amount the employee paid. In addition, no National Insurance contributions are payable by the employer.
If the above information sounds interesting, take a look at these FAQs for answers to some of the most common questions.
Yes. It is possible to use universal terms and conditions alongside an option agreement that has been individually drafted for the employee.
You can choose to get HMRC to agree on the scheme if you prefer but it is not mandatory. Once an option has been granted, the only requirement is to inform HMRC within 92 days.
If either the employee or employer ceases to meet the qualifying criteria before the options are exercised, the tax efficiencies will be removed. This is known as a disqualifying event.
A tax return must be made to HMRC by 6th July every year by every company that has any EMI share options. This is the case even if there have been no changes to the scheme, such as new members or leavers.
Failing to submit a report to HMRC on time will result in a financial penalty. These start at £300 but can rise to more than £1,000. The scheme may also be at risk due to non-reporting. The penalties will apply even if there are no changes to report to HMRC.
It is possible to include terms that permit the rights to be exercised after the employee's death, but these rights must expire within one year.
If you have any questions about the issues raised in this article, we at Key Business Consultants can help. Get in touch with us today or call us directly on 020 3728 2848.
Fill in the form and one of our expert advisers will be in touch with you shortly.
Any tax investigation that HMRC carries out can be regarded as serious. However, if you…
Usually, people work as either a self-employed individual or an employee for a business. Nevertheless,…
It is HMRC’s aim to ensure that taxpayers comply with the regulations and law, but…
VAT inspections involve HMRC visiting or contacting your business to carry out an inspection of…
Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this…
Exciting Merger Alert: London's Reed Taylor Benedict & Benedict Leff Accountants Acquired by Key Business…