The Continued Rise of the EMI: Can Private Companies Ride the Wave?
Of the many types of share schemes available to companies in the UK, none has had quite as much success as the Enterprise Management Incentive (EMI). In fact, 83% of companies who offer tax-advantaged schemes offer an EMI.1
Its versatility and tax efficiency have made the EMI particularly popular with private companies, and therefore it’s only right that we look into what an EMI is and examine some of the reasons behind this substantial growth, and help you determine if adding an EMI to your share scheme mix makes good sense.
What is an EMI?
The EMI was introduced by the Finance Act 2000 to allow companies of a certain size (see ‘Requirements for adopting an EMI’ below) to provide tax-advantaged awards of share options of up to £250,000 per employee, enabling their employees to share in the growth of the business.
Why are EMIs so popular?
Did someone say tax relief? Unsurprisingly, this is the major reason for their appeal. The increase in share value between the grant date and exercise date is subject to the capital gains tax (CGT) regime (which would effectively be 10% on the gain) rather than income tax rates of between 20%-50%.
According to the HMRC’s most recent snapshot of employee share scheme statistics, the average tax relief per employee is considerably higher for EMI schemes when compared to other tax-advantaged schemes. This of course can be explained by the fact that EMIs are granted to fewer employees in a company, and the maximum value of these options being granted can be up to £250,000 per employee. It’s not just the employee who can benefit either, as employers can claim corporation tax relief and a saving in NI contributions.
Source: HM Revenue & Customs. Employee Share Schemes Statistics for 2016 to 2017 (PDF)
EMIs do not have to be offered on equal terms to every employee, so each employer can determine who gets what. The right to acquire the shares can be made conditional on meeting performance targets or the occurrence of an exit event such as a sale or listing.
Recruitment and retention
All employers want to recruit the best talent and keep it, right? Poor cash flow is the single biggest reason why four in ten startups fail in their first five years. So, how can these employers successfully compete in the hugely competitive labour market? An EMI can allow an employer to supplement basic pay with shares, with the ultimate objective of them realising some level of capital gain in the future.
With all these great benefits, you are probably thinking, ‘This is perfect for me and my organisation but what’s the catch?’ In short, there isn’t a catch, but there are various conditions that employers and employees must meet in order to qualify for an EMI.
Requirements for adopting an EMI
- The total value of the company’s gross assets must not exceed £30 million
- There must be fewer than 250 full-time employees on the date the EMI options are granted
- The company can’t be a subsidiary or controlled by another company
- An employee can receive EMI options as long as they spend at least 25 hours per week, or at least 75% of their working time, as an employee of the company
- Companies who operate within the banking, insurance and property sectors do not qualify
Other key things to bear in mind when considering EMIs are share valuation and HMRC notifications. The valuation impacts the tax position, so without any valuation you can’t grant any EMIs. Once granted, the issuing company must notify the HMRC within 92 days of the grant date, which can be done online.
In summary, there is ample evidence which suggests that companies offering share schemes outperform those that do not. As private companies continue to compete for the best talent, it’s important that they leverage the tax advantages available to them. The EMI forms part of this and offers a great alternative where cash remuneration isn’t always readily possible.
For further information on how Solium can support you with your share scheme requirements, visit Shareworks for Private Companies or get in touch with me.
HM Revenue & Customs. Employee Share Schemes Statistics for 2016 to 2017.
As Client Development Manager, Ayaz is responsible for leading the Shareworks by Morgan Stanley EMEA Private Market business. Ayaz previously spent nearly nine years at Link Asset Services (formerly Capita) where he worked as a Senior Business Development Manager specialising in share registry, equity compensation, and trustee services. He has developed a wealth of product and industry knowledge, having also worked on IPO and M&A transactions and through being a regular attendee to industry forums and events. Before this he worked in Investment Banking with Deutsche Bank and JPMorgan.