Finance June 26, 2019 Last updated June 24th, 2019 217 Reads share

Attractive Remuneration Using An EMI Scheme

Attractive Remuneration Using An EMI SchemeImage Credit:

Designing an Enterprise Management Incentives (EMI) Share Option Scheme

Due to a growing number of creative startups across the globe, there has been a huge demand in requirements for skilled labor, employers want to hire and retain the best employees in the market. The market is full of millennials means that money is not the only thing that motivates or attracts exceptional talent these days, employers, therefore, have to think outside the box to design attractive pay packages that incentivize employees to stay longer and work harder. These include things like Gym Memberships, Free Breakfasts, Health Insurance, Training budgets, etc. Owning a part of something which you work to build is an amazing motivator, share and option scheme incentives are therefore used as part of pay packages to provide employees with an offer of more than just money. It is the offer to own a piece of what you are working to build. The EMI scheme is something that the government has designed for UK employers to help offer employees tax efficient incentives to grow and expand quicker.

  • EMI schemes are designed to motivate, retain or compensate employees in order to help new or growing companies grow faster.
  • The EMI (Enterprise Management Incentive Scheme) scheme is a scheme under which employers can grant share options to vital employees’ tax efficiently to reward them for their service period or their performance.
  • When employees are presented with EMI share options, they can be given the option to convert the options into shares as soon as possible, at a future date or upon the sale of the company.
  • These options are meant to provide an incentive for every employee given that the share price is already fixed for tax purposes at the time the options are granted. Any gain on the difference between the grant price and the exercise price of the options is free from income tax chargeable which acts as an added incentive for employees under a more favorable capital gain tax (CGT) regime.

HMRC does not review and approve option schemes that come under EMI although it can agree to approve company values. To achieve this goal, make sure that your scheme passes all the qualification requirements for EMI where the tax treatment follows the legislation for EMI. Setting up a scheme and getting a valuation on the share options can get complicated, speak to an Accountant who specializes in the process.

Setting up the EMI Share Option Scheme

Employee share option schemes or employee share schemes are extremely complicated, the employer and employee will, therefore, have some key things to consider regarding the tax laws, company laws, and employment laws when designing an EMI scheme. It is a common trend to discover that both the participant and employer are not fully conversant with the conditions and terms of the schemes, which can result in confusion, errors and employment disputes in the future. Consult an Accounting firm who has experience in helping businesses design effective EMI schemes.

Once a scheme has been set up successfully there are certain conditions which have to be met if an employee wants to exit the scheme, the conditions are as follows:

  • Your option will automatically vest once the company is sold;
  • Your options will vest over an agreed vesting period, the employer an employee will agree as per the share option agreement the vesting period which will span a certain period of time (months or years).

Articles and Rules

When designing an EMI Scheme, the employer will have to review the effects of the share scheme on the rights of pre-existing shareholders, updating of amending any changes required to the shareholders’ agreements. Once the EMI scheme is setup option agreements will also have to be set up which will cover things like vesting schedules, the rules of the scheme and what rights the options bring with them.

Under an exit-based EMI scheme you will not have to worry about your employees holding any shares, the shares vest once the company is sold, at this point the options vest into shares and are immediately transferred over to the buyers at market value, giving a gain to your employees while providing comfort to the buyer that they retain all shares being purchased.

In case you decide to offer your employees with EMI options which vest over a specific period of time, you will be obligated to make some amendments to your Articles in order to include the following:

  • Provisions to handle the leaving employee shareholders
  • Pre-emption rights for employee shareholders
  • Rights of transfer
  • Beneficial ownership
  • Disputes between shareholders

After working out and including all the amendments mentioned above, you will have to look into the tax position for the sake of modifying your plans in accordance to the following key factors:

  • The tax legislation of Part 7 ITEPA, 2003
  • The company Act of 2006
  • Formulating your scheme rules
  • Vesting conditions to determine when shares can go up
  • Those who qualify for shares and those who cannot
  • Dealing with disputes among shareholders
  • Leavers
  • Valuation
  • Takeovers

Employee-share-option-schemes

Tax

The employer will have to make sure that the EMI scheme is compliant for the purpose of all tax legislation. The employer has to take into consideration what other taxes the scheme interacts with, ensure that all extra NICs charges are covered and understand what qualifies for the Corporation tax relief. Speaking to a specialist Tax Accountant or an Accountant in London can add value to the process by making sure that you are extracting maximum benefit from the scheme setup.

Valuation

The market values of your existing shares at the time an EMI option is granted should be agreed upon with HMRC. But this can be agreed upon even before any option is granted. Most employers prefer this method because it gives some certainty regarding future charges on tax. However, it gets extremely difficult to find the exact values of employee shares because every company differs from the rest and rules for the schemes including company Articles operate differently. When you overvalue your shares, it is likely that your employees may lose everything. On the other hand, undervaluing your shares may compel HMRC to reject your valuation. Try and get the valuation done by either a corporate finance specialist or a recognized Chartered Accountant, they will follow all required processes and get the required pre-approvals from HMRC on the valuation to avoid any future disputes.

Timings 

Creating a share option scheme takes some time but it is prudent for the employers to engage specialist help such as a Tax Accountant and a Lawyer in a bid to find out exactly what is required and how it needs to be set up correctly. When it comes to creating the scheme rules, passing necessary resolutions and amending articles, a lot of time is needed. It can be two to three hours or it can take even longer where bespoke articles and shareholders are involved to tackle a number of issues. A valuation may take five hours to several days depending on the company’s size, available information and the accounts.

 

Design Problems 

An employer may choose to offer employees shares but then choose on offering EMI options, acquiring shares under this option scheme will not only be hard but the shares will also carry so many restrictions that they will have no capital value. When employees realize that their share options have such low values, it may have a negative impact on their relationship with their employers. It is therefore important that these options have clear vesting conditions that are easy to understand, implement and calculate, try and keep the scheme as transparent as possible. Speak to your HR department to design proper communication around these schemes in order to avoid future confrontations.

 

Health Warning

A lot of care is needed when approaching share option schemes. If not, the outcome may turn out to be something that doesn’t make sense. In fact, it may make life to be somehow complicated and difficult for the shareholders and companies in case disputes arise over shareholders or options agreements.

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Thao Le

Thao Le

Thao Le is a Senior Accounting Manager at Clear House Accountants. Having worked and grown in the industry for a number of years she is now responsible for a team of accountants, tax planners and bookkeepers, working with them to help clients from a variety of industries, grow, save money and plan for the future. Thao holds a Bachelor and Masters degree in Accounting and Finance and is currently working towards her ACCA, she is also a Xero and Quickbooks Certified Advisor. Thao believes her expertise lies in high-level tax planning, management accounting and strategic business planning based on financial performance and business analytics. Her experience, expertise and knowledge make her an exceptional contributor at clear house towards various articles and research content.

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