28 May 2013

EMI Scheme Reforms

EMI Scheme Reforms

Jacqueline Law, Corporate and Business Advisory Partner, looks at the recently announced changes to the Employee Management Incentive Scheme and what they mean for the corporate client.

Jacqueline Law, Corporate and Business Advisory Partner, looks at the recently announced changes to the Employee Management Incentive Scheme and what they mean for the corporate client.

Employee Share Schemes are a valuable tool in recruiting, retaining and motivating employees.  The theory is simple: a worker who has a personal stake in a company will take more responsibility for it.  

The evidence shows that this is reflected in the economic strength of such companies - a happier workforce, more engaged with the objectives of the company equates to better staff retention and higher profitability. 

In a bid to further encourage Employee Share Schemes, the Government has, as of 4th April 2013, made the Enterprise Management Incentive Scheme (EMI) more attractive.  All participating individuals will be able to claim Entrepreneurs' Relief (which allows Capital Gains Tax to be paid at 10%, instead of 18% or, 28%) on the sale of shares acquired on the exercise of EMI options, providing the option was exercised on or after 6 April 2012.  Previously, to benefit from Entrepreneurs' Relief, the individual must have held at least 5% of the share capital and voting rights of the company for a period of 12 months prior to the sale, however, in this context this requirement has been removed.  

In addition, an individual will now have 90 days instead of 40 days after a “disqualifying event” (e.g. the option holder leaving employment) before income tax benefits start to be lost. 

Whilst EMI is an HMRC approved Share Scheme, there are numerous types of unapproved or fully taxable Share Incentive Schemes. These schemes provide share incentives but do not attract favourable tax treatment.  Such Schemes are frequently used when the company does not qualify for an HMRC-approved scheme, or an approved scheme does not provide the flexibility or the value of share awards the company requires. 
The Government have confirmed that it will now consult on a number of issues relating to such unapproved share plans in order that legislation can be introduced in 2014. Specifically it has indicated that it is considering:

  • Establishing an employee shareholder vehicle: effectively, a UK Employee Benefit Trust for managing employee share ownership which would benefit from a number of tax reliefs.
  • Changing the timing of income tax charges applying to private company shares.

The Government has historically viewed employee share plans with a degree of cynicism due to a perceived potential to be used by companies to avoid tax.  Now, in darker economic times, the Government appear to view such schemes more favourably.  This may be because the recent influential Nuttall Review suggested that companies with employee share ownership performed better in tough economic times.

Jacqueline Law, Partner


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