Historically, ‘tax-approved’ schemes were quite prescriptive, involved long holding periods and were fairly onerous to implement, and therefore not something any food business – particularly a start-up or early-stage company – would consider taking up. The Enterprise Management Incentives (EMI) Option scheme introduced in 2000 broke that mould.
Under the scheme, employees working full-time, or a majority of their working time, can be offered options to acquire shares in their employer, with considerable tax benefits.
How it works
Provided the options are offered at the market value of the shares at the time of the grant (which can be agreed through an application to HMRC), there is no tax payable on grant or exercise and only capital gains tax on sale of the shares. If the employee has held the option for one year (two from 6th April 2019) they should also qualify for entrepreneurs’ relief, giving rise to a potential tax rate of 10% on any disposable proceeds.
From the employer’s perspective, the costs of setting up the scheme are tax deductible; any num-ber of performance conditions can be included; and (the icing on the cake) the company gets a corporation tax deduction for the difference between the value of the shares at exercise and the exercise price paid, even though it’s incurred no expense.
Typically, an EMI Option scheme is ‘exit-only’. This means that it is a condition of exercise of the options that there is a sale of the business – the employee exercises and sells straight away. The scheme rules usually provide that the employee also forfeits their option if they leave. An EMI scheme therefore rewards only those who stay the course and creates a meaningful financial in-centive to do so, while also virtually eliminating the risk of having long-term minority shareholders.
Taken together, these factors make EMI Options highly effective, even for relatively new and small-er companies. Employees are given a stake in the business encouraging long-term commitment. If they leave, nothing is lost.
While aimed at small- and medium-sized enterprises, the scheme’s limits are generous. Inde-pendent traders with up to 250 employees can qualify provided gross assets are less than £30m, which isn’t a problem for many food businesses. For those at the higher end of the scale, options over an initial share value of up to £3m can be offered by the company and up to £250k individually.
If you don’t meet the criteria for EMI, all is not lost. A number of other schemes offer some tax bene-fits, including ‘all-employee’ schemes such as Share Incentive Plans and more bespoke arrange-ments such as growth shares and nil paid shares. In most circumstances it will be possible to de-sign a scheme without too painful a tax cost, but expert advice is required.
Companies that encourage employee share ownership generally report more motivated employees, better retention and increased productivity. Or, to return to the language of food, they have their cake and eat it.