Budget announcements affect EMI options

The EMI option scheme is the UK’s most tax-efficient employee share incentive scheme so how, if at all, has it been affected by the Spring Budget? Rishi Sunak delivered his budget statement to the Commons on 3 March and there were two announcements affecting EMI options which have direct relevance to EMI and should be of interest to HR bearing in mind these are the most popular schemes operating in the UK in view of the tax breaks on offer and their all round flexibility – more on that shortly. But first to the Budget and those changes. Fleur Benns is a share plans specialist and I phoned her to ask what she made of Budget generally and the changes to EMI in particular:

Fleur Benns: “The Budget itself was quite a quiet one for share plans. The expected rise in capital gains tax rates, which was concerning for share plans, didn't actually occur but behind the major headlines there were these two announcements which are of particular relevance to share plans. So the first is in relation to the technical aspects of the tax advantaged EMI or Enterprise Management Incentive arrangements, and the interplay with the working time requirement that employees need to meet in order to be granted, and maintain, EMI status with furloughed employees or employees working on reduced hours due to COVID and who therefore cease to meet those working time requirements. So last year in order to protect those employees who have been furloughed or were working reduced hours that requirement to meet the working time of at least 25 hours a week or, if less, 75% of their working time, was actually suspended until 5 April 2021. It was announced in the Budget that the suspension would continue now until 5 April 2022. So again that gives companies further comfort and respect of where they've had to furlough staff or staff are working on reduced hours, they can maintain that tax advantage treatment in relation to their EMI options. Then staying with the EMI the second announcement was the Treasury which published what they're referring to as a 'call for evidence' on whether this tax advantaged EMI options regime should be extended to a wider range of companies and on how EMI options are actually being used in practice. At the moment a number of qualifying criteria apply which limits the amount of companies who can use EMI options. For example, an EMI qualifying company can't have gross assets of more than £30 million pounds, or you can't have more than 250 full time equivalent employees. So really the call for evidence is an opportunity for companies to comment on the current scheme and how changes could be made to perhaps widen the scope which would enable more high growth companies to recruit and retain employees by relying on that tax advantaged treatment. So the details of this consultation are found on the government website. The consultation remains open until 26 May of this year and so we would encourage companies to make any submissions that they feel would be helpful to widen the scope of EMI options."

Of course this assumes you have a basic knowledge of EMI options, how they operate and why they are so popular. Lynette Jacobs is also part of the share plans team - I phoned Lynette for a basic overview of EMI which are largely geared to SMEs:

Lynette Jacobs: “EMI options can only be used by smaller companies but nevertheless £30 million gross assets and 249 full time employees is a reasonable sized company and many of the listeners may work for companies that are eligible to grant those options and may indeed grant them at the moment. If they don't grant them it is something definitely worth looking at because to the extent the option is granted at a price to paid by the employee that is equal to the market value at the time the option is granted then in ordinary circumstances no income tax or social security contributions will arise when the individual acquires the shares when they exercise their option. They will be subject the capital gains tax, which is at a lower rate than income tax, as and when they sell those shares, and a particular advantage of EMI options is that so long as the shares are sold at least 12 months after the grant of the options, so not when the shares are acquired but when the option was first granted, then the shares will be subject to entrepreneurs relief meaning that capital gains tax will be payable only at 10% so that is clearly a great benefit to your employees. You can also grant options under EMI plans where the exercise price is below market value, so it is a discounted option at the time of grant, and when that happens that just means there is still no income tax or national insurance when the option is granted but when the option is exercised income tax, and normally national insurance contributions, are payable but just on that discounted element. So they are very favourable to companies and employees. They are very much liked, they are simple because the individual doesn't get their shares until the time they exercise their option and you can design them subject to performance conditions and if you are a private company you can design them so the options can only be exercised and the shares acquired if there is an exit so you don't have shareholders until the time of an exit and you can grant them to as few or as many employees within the organisation as you like."

You can find more detail on EMI options, the tax advantages they offer and the qualifying criteria by going to the guide published last month by the share plans team. That is available now from the Outlaw website.