What are the tax efficient Enterprise Management Incentives (EMI) and Share Incentive Plans (SIPs) share schemes for the employees working in an Ltd formation UK company?

10 Jan

According to the Enterprise Management Incentive (EMI) scheme, there is no charge of income tax or NIC on either the exercise or grant of options under the condition that the occurrence of the exercise is noticed within 10 years of the grant and the price of the exercise is at least equivalent to the shares market value at the grant date. The operation of this scheme along with the share incentive plans scheme will be discussed in the blog in order to provide guidance on tax efficient schemes for shares to the employees.

Enterprise Management Incentive (EMI) Scheme

Operation of Scheme

The intention of the EMI scheme is to provide help to smaller and high risk companies in the process of recruitment and retaining of the employees who possess the skills in order to help them in growth and success. The scheme also provides a pathway in order to reward the employees who took some risk through investment of their skills and time so that the small companies are able to achieve their potential. If an employee wants to acquire the EMI options, then he/she should spend some specific amount of time each week working for the Ltd formation UK company. However, the choice of the employees who get the EMI options, can also be made by the company itself. Hence the scheme of enterprise management incentives is useful specifically for the companies that intend to give rewards to the employees.

The EMIs are somewhat similar to the company share option plans (CSOPs) since an employee has the option to buy some shares. There are some particular features of the EMI scheme, as described below:

  • Before exercising an option, a target may be set by a company that is to be achieved. The definition of the target must be clearly given at the time of granting the option.
  • The employees of a qualifying open Ltd UK company can get options over shares worth up to the amount of £250,000 at the time of grant, which is subject to a total of £3m.
  • Although there are some tax consequences, at the date of grant, the granting of options can be done at a discount below the market value.

The features mentioned above of the EMI schemes render them better than a CSOP scheme, but there exist some restrictions when deciding which companies can make use of the EMI schemes or operate them.

Tax Implications for the Exercise and Grant of Options

There is no charge of income tax or NIC on either the exercise or grant of options under the condition that the occurrence of the exercise is noticed within 10 years of the grant and the price of the exercise is at least equivalent to the shares’ market value at the grant date.

If at the date of grant, the grant of options was done at a discount to the market value, then there is a charge of income tax and most probably a charge of national insurance contributions at the event of exercising the options and not the grant of options on the lower of the difference between the shares’ market value at the exercise price and the date of exercise, and the discount (which is the difference between the shares’ market value at the grant date and the paid cost for the shares (the exercised price)).

Tax Implications of Shares Sale

When the shares which are acquired under the EMI scheme are disposed of, there is no charge of national insurance or income tax. When the sale of shares is made, any gain becomes subject to the capital gains tax (CGT). The cost in the calculation of gain is the amount whose payment is made for the shares, with the addition of any discount whose taxation is done in the form of earnings.

In the case where an individual performs the acquisition of shares on an EMI option exercise and the shares are disposed of on or after April 6, 2013, then the gain is eligible for the relief of entrepreneur where the grant of option was done at least one year prior to the disposal date (which means that for the application of entrepreneur’s relief, the duration of ownership of the option counts towards the ownership condition for one year). One of the usual conditions for the application of the entrepreneur’s relief states that the individual must have been an officer or an employee for at least one year terminating with the date of disposal, but does not need to have an ownership of at least 5% of the shares of the company.

Conditions for the Schemes of EMI

  • Qualifying Company
  • When the granting of options is done, the company that can be listed on a stock exchange is required to fulfill certain conditions. Specifically, the gross assets of the company should not be more than £30. Any other company should not be controlling the company under question. After form a company UK there are a number of trades that qualify, out of which the company should carry on any one of them. At the event of granting the options, the company should have less than 250 full-time equivalent employees.
  • Eligible Employees
  • After starting a company in England or UK, the employment of the employees should be done by the company or group for a minimum of 25 per week hours, and in case if it’s not up to that hours, then for minimum of 75 percent of in work time (self-employment inclusive). The employees who have the ownership of 30 percent or more of the ordinary shares in the company are not included.

  • Qualifying Shares
  • In order for a share to qualify under the EMI scheme, it should be a fully paid up irredeemable ordinary shares. The rules allow restrictions on forfeiture conditions, sale and performance conditions.

  • Limit of Shares
  • The options of shares over EMI with an amount about 250,000 pounds on the grant date can be held by an employee at a single time. Conditions and restrictions attached with the shares may not be considered when performing the valuation of shares. In the case where the grant of options is made above the limit of 250,000 pounds, then the relief is provided on options up to the limit. Once the employee has reached the particular limit, the EMI options may not be granted for three years which means that the employee may not top up with the new options instantly following the exercise of old options. Any options that are granted under a CSOP, result in the reduction of the limit of 250,000 pounds, but the share options of SAYE can be overlooked.

  • Disqualifying Events
  • There exist a number of disqualifying events that include an employee who stops spending at least 75% of their working time with the company. The availability of the EMI relief is up to the event date.

EMI Schemes Costs

During the calculation of profits, the costs of on-going administration and setting up a scheme are to be subtracted.

Grant of Options Notification in EMI Schemes

A notification of the grant of options should be given to the HM Revenue and Customs within the period of 92 days and it is not mandatory for the employees to perform submission of schemes to HMRC in order to get them approved. Then, to check whether the grants meet the rules of EMI, the HMRC has a period of 12 months.

Prior to the grant of options, the details should be submitted by a company to small company enterprise center in writing. Then a confirmation will be provided by the officer of revenue and customs and inform whether they are satisfied that the company will be a qualifying company on the basis of supplied information, in a written form.

Some certain details need to be submitted, that include:

  • Articles of association and a company of memorandum and details of any proposed changes.
  • A copy of the latest company accounts and its subsidiaries.
  • Trading details and other activities carried on, or to be carried on by the subsidiaries of the company or the company itself.

There is no possibility of advance approval in respect of any other aspect of EMI, for example, whether an employee is an eligible employee or not.

Share Incentive Plans (SIPs) for the Employees

According to SIPs, after open Ltd UK company, employees may be provided with an amount of £3000 of free shares a year. Also, they can buy up to an amount of £1500 worth shares of partnership each year and the employers can give up to £3000 worth of matching shares. After the holding of shares has been done for the period of five years, there is no NIC or income tax when the shares are removed from the plan.

Operation of Scheme

There is a difference between the SIPs scheme and other schemes, as the grant of options is not made to employees, rather they get the shares that are held in the plan. All the employees of the company, whether full time or part time, subject to a minimum employment period, should be eligible for the participation in the plan.

The employers after form a company UK can give up to free shares worth an amount of £3000 a year to the employees. Employers who make an offer of the free shares should also make an offer of a minimum amount to each employee on similar terms. Between the £3000 amount’s minimum and maximum, the employer can make an offer of the shares in different amounts and on different basis to different employees, which means that the employers can give a reward of either individual or team performance. The employers can set certain targets of performance subject to the overriding requirement that any features that have concentration on rewards on directors and highly paid employees are not contained in the plan.

At any time within a year, the employers can also make a purchase of the partnership shares. In any year of tax, the funding of these shares can be done through subtractions of up to an amount of £1500.

The employees can also be awarded with matching shares free from the employers who make the purchase of partnership shares at a 2:1 maximum ratio.

A plan may be involved in the provision of free and matching shares to be forfeited in case of the employee leaves within a duration of three years, unless the employee leaves for some specific reasons such as redundancy or retirement.

The operation of the plan must be carried out through a trust that is residing in the UK. The acquisition of shares is done from the company by the trustees or if the incorporation of partnership shares is done by the plan from the employees.

The stamp duty does not need to be paid in the case when an employee makes the purchase of shares from a trust of SIPs. The payment of stamp duty must be made by the trust when the acquisition of shares is done. There is no occurrence of taxable benefit on an employee as a result of trust of SIPs or an employer making the payment of either the incidental prices or the stamp duty for the operation of the plan.

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