August 1st 2018 / BY: Wisteria

Mind that GAP – EMI state aid takes a break…

Some of you may have heard of Enterprise Management Incentive (EMI) schemes which are tax advantaged approved share schemes which many organisations offer to maintain key staff and employee. It has been one of the most popular employee share schemes to have been introducted.

In recent months however, due to the inability of HMRC to secure EU State Aid on these types of options, there was a period of approximately 6 weeks where employers interested in issuing such an option to employees were unsure as to whether the EMI options would maintain their tax advantaged status. This was due to the government failing to secure a timely extension of an existing exemption from the EU State Aid rules.

After weeks of confusion and unknown, HMRC finally confirmed that the state aid had been reinstated and that normal service is to be resumed (this has been confirmed up to at least when the UK leaves the EU).

Here we touch upon the basics of EMI options and why they have been so attractive and popular to date.

Under an unapproved share option scheme, if a company grants an employee an option at the market value but at the point this is exercised, the market value has increased, the employee will be subject to income tax on the uplift in value. Upon the subsequent disposal, the employee will then be subject to capital gains tax on the difference between the sale price and the value at the date of exercise.

With an EMI however, should the options be granted at the market value, the employee would face no income tax charge upon exercise even if the shares have increased in value. As such, this can be seen as an ideal way to incentivise key staff by offering them equity in a company. Upon disposal (like the above) the employee will suffer capital gains tax on the difference between the sale price and the value at date of exercise.

Note – should the EMI be granted at a discount, then income tax issues may arise.

In order to qualify for the tax advantaged EMI scheme, there are of course a number of conditions which include:

  • Company must have gross assets of less than £30m
  • Have fewer than 250 full-time employees
  • Have a permanent establishment

From the employee side, in order for them to qualify, they must work for at least 25 hours per week on average and also cannot directly or indirectly own more than 30% of the ordinary share capital.

As it seems that EMI qualifying status will be around for years to come, if this is something that you and your business wish to look to incorporate and offer to employees, then please reach out to one of our taxation specialists so that they can guide you through the required processes.