Enterprise Management Incentive Scheme (EMI) – Who says the taxman gives Employees sweet FA?
There are certain events in your life which change things forever. Moving house, buying your first car and getting married are all great examples. But they all pale into insignificance compared to selecting which football team to support.
Leyton Orient
If you look at it objectively a football team can mould your life. Select a team who is succesful and face being labeled as a glory grabber and rightly ridiculed *cough Man U cough*. Select a team a lot further down the pyramid and you are a described as a bit of an eccentric or an anorak. The general rule is that you should support the team that you were born closest to. Luckily (for me) Jabo (#1 son) was delivered in Whipps Cross Hospital which puts him squarely in the catchment area of Leyton Orient.
It was a wet saturday morning when I suggested that I take Jabo to his first football match (Orient v Walsall). There was some trepidation from Mrs TTF who was concerned for his safety. After I explained that there were more danger of seeing a goal than any violence she reluctantly agreed. After Jabo was dressed in the latest dri-fit(polyester to you and me) kit Mrs TTF and Baby Jarvis (#2 son) waived us off. Baby Jarvis was dressed in a retro kit (Last seasons hand me down) for good luck.
All went well and we arrived at the ground in good time. Jabo sat on my lap for the entire first half and seemed to enjoy the experience. Orient was even winning and there was a bit of singing. The second half commenced and it was at this point that Jabo found the folding seats more entertaining than the spectacle of football that was being played out in front of him. After threats of “if you carry on doing that I’ll bring you again” he seemed to settle down. Then with ten minutes to go he said a new sentence that I had not heard from him before…”can we go home now”. Orient then scored which kept him happy for the rest of the match but gave me the hump because I missed it whilst talking to him.
On returning home he told Mrs TTF he had enjoyed football and commenced kicking everything in sight including Baby Jarvis. So now he has experienced Orient I need to keep him motivated so that he can say to the kids in the playground that he wants to be the next Kevin Lisbie!
Moving away from football how can we use tax incentives to keep employees motivated?
THE TAX BIT
The Enterprise Management Incentive Scheme (EMI) is a share option scheme which allows companies to grant options (promises to buy shares) to key employees. The employees can then purchase the shares if they meet certain conditions. The conditions are flexible and can relate to increases in profit, sales or even on the eventual sale of the company if a sufficent offer is accepted.
How EMI can help motivate & Retain Staff
The scheme is attractive as it will motivate the key personnel to reach their targets whilst building the company’s profits and value for the existing shareholders. It will also help to retain the key personnel as they will eventually own shares in the company.
The life of an EMI can be broken down into three areas:
1. Grant
Unlike if an employee is given shares there is no tax due on the grant of an option to an employee. The option agreement must confirm the amount that the employee will buy the shares for but this does not have to be market value. It is however important to agree the market value of the shares with HMRC at this date as this value will have a tax effect on exercise.
If the employee leaves before exercise then they forfeit their options. This is another advantage over giving shares.
2. Exercise
When the employee meets his targets he can exercise (buy) the shares under option. It is at this point that a tax event will occur. The difference between the price paid and the market value at grant will be assessable to income tax. In addition national insurance will also be due on the difference if it is possible to sell the shares immediately.
3. Sale
In the event of a sale the employee will be subject to capita gains tax on the difference between the market value at grant and the sale proceeds. Unlike other assets new legislation will enable a qualifying employee to benefit from entrepreneurs relief even if they do not hold 5% of the shares.
In addition the twelve month holding period will commence from the date of grant which again has resulted from new legislation. If entrepreneurs relief is available then the capital gains tax will be at the rate of 10%.
As always there are various conditions to be met including restrictions on the amount of shares and the business activities of the company. You should therefore always seek advice from a qualified chartered tax advisor.
Company Benefits
A lesser known benefit is that the company can claim a deduction for corporation tax based on the growth in value of the company’s shares between the date of grant and exercise. This can generate a large amount of corporation tax relief especially if the options were granted on startup.
EMI is a powerful tool to help motivate and retain key members of staff. Employers should therefore explore this avenue as an alternative to bonus payments as it will also generate a cashflow advantage in terms of the bonus and associated national insurance.
Now, should I tell Jabo that Orient beat Barcelona five or six nil?
By Peter Cross
Google
The Tax Father 