One of the biggest problems faced by many businesses is attracting and retaining key members of staff. It can be very difficult to find and keep employees who care about the business and its success as much as you do.
Enterprise Management Incentives (EMI) is an HMRC approved tax-advantaged share option scheme. Qualifying companies can award options over shares in the company to select members of staff.
One of the key benefits for the company is that the options can be subject to detailed performance criteria. Therefore, relevant employees will only receive shares in the business after meeting those targets.
Shareholders are often reluctant to ‘give away’ part of the business, therefore the targets could be based on the company performance and/or growth. As a result, on the assumption that the targets are met and options are exercised, the existing shareholders may own a slightly smaller portion but of a much larger business.
In addition, it is fairly standard for any options awarded under the scheme to be subject forfeiture should the employee leave the company during the option period. This is an important factor in retaining key employees for the long term.
For employees who participate in the scheme, it provides a sense of ownership and suddenly their interests are aligned with the shareholders as they will directly participate in any future growth and success.
Generally speaking, businesses with share schemes tend to outperform those without any employee ownership.
Of course, companies could achieve a similar outcome through the use of a performance related bonus. However, any such bonus would be liable to Income Tax and National Insurance. Depending on the employee’s tax position, they could lose up to 47% of the bonus.
Under the EMI scheme, any increase in value between the date the options are awarded and the sale of the shares would be subject to capital gains tax. Based on current rates and subject to meeting the conditions, this could be taxed at 10%.
As the scheme is approved by HMRC, there are detailed conditions to be met by both the company and the relevant employees.
If you would like further advice on EMI schemes or employee ownership, please contact Craig Harman on 01892 543900.