Enterprise Management Incentive (EMI) Schemes – A tool to aid succession!

The following post is from Stuart Sheldrick, Director at Chelmsford:

“Enterprise management Incentive (EMI) schemes – Tool to aid succession

Following my previous article in relation to succession planning, one key aspect to discuss with the clients as part of this process is to ensure there is not an over reliance on the parties who are likely to exit as part of a sale.

Too much reliance on the owners of the business could impact the valuation of the business, and therefore it is important clients create a management team, to drive the business forward without the reliance on the owners.

In creating this management team this in most instances will give far greater flexibility on an exit, as they could potentially exit the business as part of a management buyout (MBO), or likely strengthen their changes of selling to private equity.

To ensure the management team are retained, a tool to assist with this as part of their remuneration structure, could be the use of an EMI (Enterprise Management Incentive) scheme.

EMI schemes can be used to retain and motivate selected employees or all employees (as the company’s shareholders see fit). The scheme confers significant tax benefits on both companies and their selected employees.

The EMI scheme is extremely flexible and can be tailored to meet a company’s specific objectives.

EMI schemes allow companies to grant options (i.e. rights to acquire shares) to qualifying employees on a highly tax efficient basis, for both the employer and participating employees.

EMI options can be granted over UK or overseas company shares, provided that at least one company in the relevant group has a UK permanent establishment.

Certain other requirements must be met by both the company and the employee in order for options to qualify as EMI schemes, such as a limit on a company or group’s gross assets through to the employee working at least 25 hours a week (or at least 75% of his or her overall paid time).

Enterprise Management Incentive (EMI) can form a tax efficient part of a company’s succession planning (bringing selected key employees through to have a stake in the business) or be used as a pure incentive arrangement.

Benefits of EMI schemes

EMI schemes offer significant flexibility, and arrangements can be designed to meet a company’s commercial objectives.

EMI also confers real tax benefits on both employers and employees which can result in:

For employers

• No tax cost (subject to certain conditions);
• No employer’s National Insurance Contributions (“NIC”) on either the grant or exercise of the options (provided certain conditions are met); and
• Corporation tax relief on the difference between the market value of the shares at exercise of the options (i.e. when the shares are acquired) and the option price paid. This can provide a substantial windfall to the business/shareholders on a sale.

For employees

• Lower tax costs than cash/non-EMI arrangements
• No income tax and no employees’ NIC on either the grant or exercise of the options (provided certain conditions are met)
• Capital Gains Tax (“CGT”) on the growth in value of the Growth Shares; and
• Importantly, most EMIs will start to accrue the 24 month holding period for entrepreneurs’ relief (“ER”) from the date of grant of an EMI option (resulting in a 10% (as opposed to 20%) rate of CGT). There is also no need for a 5% holding under EMI in order to qualify for ER.

As a firm we have been assisting clients with establishing EMI schemes, incorporating valuing companies, obtaining clearance from HMRC and maintaining the schemes.

This advisory work if great for us to be able to offer and therefore if you see opportunities, please ensure clients are made aware.

If you would like to find out more about EMI schemes, please contact Stuart.Sheldrick@lbgroupltd.com in the Corporate Finance team”.