Employment
issues (tax)
Share
Ownership for Employees - EMI
EMI
and SIPs
Retaining
and motivating staff are key issues for many employers. Research
in the UK and USA has shown a clear link between employee
share ownership and increases in productivity. The government
has therefore introduced two ways in which an employer can
provide mechanisms for employees to obtain shares in the employer
company without necessarily suffering a large tax bill.
The two routes are
- Enterprise
Management Incentives (EMI) and
- Share
Incentive Plans (SIPs).
EMI
allows selected employees (often key to the employer) to be
given the opportunity to acquire a significant number of shares
in their employer through the issue of options.
A SIP is designed to allow all employees to participate in
their business and to encourage long-term shareholding by
them.
This factsheet outlines the rules for EMI.
Tax
Problems Under Normal Rules
If
shares are simply given to an employee the market value of
the shares will be taxed as earnings from the employment.
This is expensive for the employee as he may not have any
cash to pay the tax arising.
In order to avoid this immediate charge, options could be
granted to an employee. An option gives the employee the right
to obtain shares at a later date. Provided that the terms
of the option are that it must be exercised within ten years,
any tax liabilities will be deferred until the time the options
are exercised.
This may still be expensive for the employee if he is not
then in a position to sell some of the shares in order to
pay the tax arising.
What
Does EMI Offer?
EMI
allows options to be granted to employees which may allow
the shares to be received without any tax bill arising until
the shares are sold.
How does it work?
Selected employees are granted options over shares of the
company. The options should be capable of being exercised
within ten years of the date of grant.
In order to qualify for the income tax and national insurance
contribution (NIC) reliefs, the options awarded need to be
actually exercised within ten years of the date of the grant.
What are the tax benefits to employees?
The grant of the option is tax-free.
There will be no tax or NICs for the employee to pay when
the option is exercised so long as the amount payable for
the shares under the option is the market value of the shares
when the option is granted.
The EMI rules allow for the use of nil cost and discounted
options. However, in these circumstances, there is both an
income tax and an NIC charge at the time of exercise on the
difference between what the employee pays on exercise and
the market value of the shares at the date of grant.
The only other possible occasion of charge to tax will be
when the shares are sold and a liability to capital gains
tax (CGT) may arise. The CGT bill should be low as:
- the
shares will constitute business assets for the purposes
of taper relief and
- when
the shares are eventually sold, CGT taper relief will run
from the date of grant of the options.
For
most employees therefore the maximum tax bill will be 10%
of the gain made on sale.
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What
are the benefits to employers?
- Employees
have a potential stake in their company and therefore
retention and motivation of these employees will be
enhanced.
- Options
will not directly cost the employer any money in comparison
to paying extra salary.
- There
will normally be no NICs charge for the employer when
the options are granted or exercised or when the employee
sells the shares.
- The
costs of setting up the option plans should be tax
deductible.
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EMI:
Points to Consider
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There
are a number of issues to consider in deciding whether
EMI is suitable for your company.
- Does
the company qualify?
- Which
employees are eligible and who should be issued options?
- What
type of shares will be issued?
- When
will the rights to exercise options arise?
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Does
the company qualify?
EMI was introduced by the government to help small higher
risk companies recruit and retain employees with the skills
that will help them grow and succeed. The company must therefore:
- exist
wholly for the purpose of carrying on one or more ‘qualifying
trades’
- have
gross assets of no more than £30 million
- not
be under the control of another company (so if there is
a group of companies, the employee must be given an option
over shares in the holding company).
The
main trades excluded from being qualifying trades are asset
backed trades such as:
- property
development
- operating
or managing hotels
- farming
or market gardening.
Which
employees are eligible and who should be issued options?
An employee cannot be granted options if they control more
than 30% of the ordinary share capital of the company. They
must spend at least 25 hours a week working for the company
or the group, or if the working hours are shorter, at least
75% of their total working time must be spent as an employee
of the company or group.
Subject to the above restrictions, an employer is free to
decide which employees should be offered options. The sole
test is that options are offered for commercial reasons in
order to recruit or retain an employee.
What type of shares will be issued?
EMI provides some flexibility for employers. For example,
it is possible to limit voting rights, provide for pre-emption
or set other conditions in respect of shares which will be
acquired on exercise of an EMI option. The shares must, however,
be fully paid ordinary shares so that employees have a right
to share in the profits of the company.
When will the rights to exercise options arise?
The options must be capable of being exercised within ten
years of the date of grant but there does not have to be a
fixed date.
Examples of circumstances in which the options could be exercised
include:
- fixed
period
- profitability
target or performance conditions are met
- takeover
of company
- sale
of company
- flotation
of company on a stock market.
Options
can be made to lapse if certain events arise, for example
the employee leaves the employment.
How
We Can Help
We
can help you decide whether EMI is appropriate for your business
and whether the business will qualify.
We are also able to help you with the necessary documentation
required to establish and operate EMI and advise on the costs.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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