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Business Tax  •  Personal tax

Why you should consider an EMI scheme this year

By RJP LLP on 31 January, 2019

The Enterprise Management Incentive (EMI) is a very tax efficient share option scheme, under which share options can be granted to officers and employees of qualifying companies. It can be a very powerful performance motivator and therefore a great way to incentivise key members of your team, without necessarily having to offer them a pay rise.

The EMI has a number of tax incentives including protecting eligibility to Entrepreneurs’ Relief (ER). This article explains why.

What is EMI?

When compared to larger companies, growing companies can face more challenges when it comes to incentivising staff to remain with the company and work hard towards its growth.

HMRC recognises that staff recruitment and retention is often more difficult for smaller companies to achieve because they cannot offer the same breadth of rewards as larger companies, so they provide the enterprise management incentive (EMI) share option scheme to assist. This scheme enables employees to participate in the growth of a company without having to ‘buy’ shares initially, and it enables companies to incentivise their employees in a cost-effective way without necessarily introducing a lot of employee shareholders.


What are the benefits?

Benefits to employees include the ability to share in the ultimate sale proceeds of a company without any initial outlay and being able to claim entrepreneurs’ relief on the disposal of their shares, even when they own a very small percentage of the company.

Benefits to the company include relatively low-cost access to a share option scheme which will incentivise their employees, and the ability to claim corporation tax relief when the share options are exercised.


How can EMI help preserve ER eligibility?

Here are 5 ways that the rules governing access to ER are relaxed for EMI scheme participants:

  • ER qualifying period commences when the options are granted rather than when the shares are acquired;
  • No need to hold the minimum 5% shareholding;
  • No need to have voting rights;
  • No need to have an entitlement to 5% or more of the company’s distributable profits (dividends); and
  • No need to have an entitlement to 5% or more of the company’s assets on a sale or winding up.

Although we cannot speculate about whether there will be further changes to the ER legislation, it is fair to assume that the government is currently very supportive of EMI, and of maintaining the tax relief available to share option holders. Given that EMI is so tax efficient and inexpensive to operate, it would be fair to say that company directors wanting to consider a share scheme and a means of rewarding employees, are advised to consider this as their first choice.

If you would like to discuss introducing an EMI scheme, please contact us for impartial advice.

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.