Our EMI scheme offering
The EMI scheme is the gold standard of share incentive schemes. For companies that qualify, it provides flexible and tax efficient equity participation for employees and is a valuable incentive and retention tool.
Despite its flexibility, it is important to note that the legislative criteria for qualification are strict, and in some aspects, complex.
As experienced corporate transaction lawyers we have seen examples of EMI option agreements which have been poorly drafted and which, as a result, do not qualify. We have also seen examples of schemes being put in place where the company does not qualify to grant EMI options. Often, a problem emerges when the company is being sold and tax advisors or accountants carrying out the buyer’s due diligence spot errors. Unfortunately this often results in options which were thought to be qualifying, instead being taxed as ‘unapproved options’. The difference in tax rates between 10% and 47% (including NICs) of the employees’ gain, is very bad news, and often the majority shareholders or company feels obliged to make up the difference to employees with a significant impact on sale proceeds.
In addition to drafting the scheme rules and ancillary documents we can advise you on any changes to your articles to create new employee shares (if required) including provisions to ensure the employee shares are acquired back by the company from leavers.
Our share valuation service
Agreeing the value of your shares at the date the option is granted is key to both to ensuring that the options are within the limits of the scheme and deliver value to employees.
We have teamed up with corporate finance and valuation firm, Aurora M&A Solutions Ltd, and are now able to offer a valuation within our fixed fee EMI scheme pricing. This means that we can do all the work in relation to your EMI Scheme as a ‘one stop shop’.
If you would like further information or a quote for your EMI Scheme, please contact Craig Bowers or Elizabeth Middleton.
What if the company is not eligible for EMI options?
If your company or employees do not meet the criteria for EMI options we can advise you on other tax-effective share schemes to enable employees to participate in the company.
Typically these schemes involve the employee acquiring the shares (rather than options) upfront at a low value, so there is no income tax charge on issue. Having paid full value, the employee is only liable for CGT on future growth in value.
The following is a general description of some of the possibilities:-
‘Reverse Share Option Scheme’
If the shares are currently of low value, for example if the business recently started trading, or there are significant intra-company loans, then from a tax perspective it can be advantageous to simply issue the shares upfront at par value.
The shares could then be forfeited if performance targets are not met. This is sometimes called a ‘reverse option scheme’ as it has a similar economic effect to a traditional option. Shares can be drafted to have no voting or dividend rights if the intention is only to give value on an exit.
Nil or Partly Paid Share Scheme
If the market value of the shares is too high for the employees to contemplate buying them, a nil or partly paid share scheme might provide a solution. In such a scheme, the employee is committed to paying the full value of the shares, so no income tax charge arises on grant, but the payment is deferred until the company calls for it on a sale of the business.
A growth share scheme involves the creation of a new class of shares which only participate in profits above a hurdle value. The value of such shares on issue is arguably negligible as they only have ‘hope value’ of future participation.
Joint Share Ownership Plan (‘JSOP’)
In a JSOP the employee shares ownership of the relevant shares with an employee trust. Under arrangements with the trustees the equitable interest in the share changes over time so that the employee gets the benefit of value over a certain threshold. Again the rationale is that the value at the date of grant is low, so there is no income taxable benefit.
The starting point for designing all tax-effective share schemes is an assessment of the current value of the shares for tax purposes. We have partnered with corporate finance and valuation firm Aurora M&A Solutions Limited to provide competitively priced valuations so can assist in providing a valuation where that would be helpful.
Our share schemes team specialises in bespoke share scheme design and implementation for SMEs. If you would like further information or to discuss your share incentive please contact Elizabeth Middleton or Craig Bowers.
If you would like to discuss how you might utilise an EMI or other share incentive scheme for your business, please do get in touch with one of the team.