Share Schemes Still Most Tax Efficient Perk And Useful Staff Retention Tool
Motivation and morale are currently highly sensitive issues for employers trying to manage costs
. The recent necessity for some businesses of cutting staff numbers and freezing salaries has left the UK with the most disaffected workforce in Europe, according to a new survey. These research findings showed that 47% of people wanted to replace their current role with a new job by the end of the year. This was considerably more than the mainland European average of 33%.At the same time, ONS figures for the July to September 2010 period show growth levels were 0.8% which is double the forecast levels, suggesting that economic recovery is happening at a faster rate than expected. This means high performing staff especially could be in a position to move on to that better job in the not too distant future. Employers need to respond to this threat and consider cost effective ways to retain their best people. In the current climate, salary increases and bonuses may still be out of the question, but tax efficient share schemes such as EMI may be a good option that also improves staff retention levels.
The Enterprise Management Incentives (EMI) scheme is specifically targeted at companies with assets of less than 30m and was designed to recruit and retain key employees. It works by allowing employees to hold options over shares worth up to 120,000, which, when exercised, can be exempt from income tax or NI. Gains are subject to CGT, which for higher tax rate employees could be 28%, or for those entitled to Entrepreneurs relief, as low as 10%,
EMI schemes were first introduced in the 2000 Finance Act and therefore the ten-year holding period will be almost up for some business owners. After this date, options exercised by employees will not benefit from the same tax breaks. Due to the recession and reduction to many company valuations, it may not have been possible to offer a traditional exit route of selling the shares via a business sale. Instead, it may be necessary to create an internal marketplace to facilitate the exercise of options and the purchase of employee shares, typically with the use of an employee share ownership trust. Creating a trust such as this has additional tax benefits for company directors, who may be looking for effective strategies to reduce their tax liability at the 50% rate. Alternatively, companies whose valuations may have dropped in recent years may wish to renew their existing share options by agreeing new, potentially lower, values with HMRC. This not only has the benefit of allowing employees to participate at potentially lower values, it helps extend the life of the options for a further 10 years.
Being able to offer staff an incentive such as EMI, even taking the CGT payable into account, is increasingly attractive to small business owners who are unable to compete with larger employers when it comes to perks. And perhaps the biggest advantage of this particular benefit is that the financial rewards are long term and directly proportional to the employees hard work and their contribution to the future success of the business.
In summary EMI qualification criteria
Business gross assets should be no greater than 30m.
Company must have fewer than 250 full time employees.
Options can be granted to any employees who control less than 30% of the ordinary share capital of the company.
Employees must work at the company for at least 25 hours a week, or, if less, for at least 75% of their time.
Options must be exercised within 10 years of being granted and exercised within that period to be free of income tax and NI.
At any one time employees may hold EMI options with a value up to
120,000 at the date of grant.
Options held above that level will not be eligible for the same reliefs.
Paul Webb is a tax expert and specialist in developing employee share schemes. To find out more about EMI and the qualification criteria please contact Paul Webb on pw@rjp.co.uk.
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