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John Warchus | 31.01.2019
06.03.2018 Thomas Clark
Forgive me for harping on, but I am passionate about EMI Schemes and their benefits. If you are not, allow me a few minutes to convince you.
I have been helping clients implement EMI Schemes for years, so long, that some of the early introducers have now exited, taken time off, invested elsewhere, and are now looking to implement EMI Schemes at these new businesses. Seeing the EMI Schemes start to finish is a wonderful thing, perhaps sceptical at first, I really have now seen their benefits, and I commend them to you.
I work mainly with technology businesses, and these can perhaps benefit most from EMI Schemes as their value at early stages are often low, but can increase furiously in short periods and on exits, allowing the tax benefits applied to huge increases in value to be maximised.
Ultimately employers want their employees’ pay and rewards to reflect effort and EMI Schemes allow employers to do this.
Setting the legals aside, let me cover some of the benefits.
One of the main benefits of an EMI Scheme is that it allows for a relatively cheap and cost/tax effective incentive.
In simple terms, if you think of an employee who is incentivised by a bonus linked to sale price on an eventual sale of £50,000 after tax, if paid through PAYE, it is likely to cost the employer (and ultimately the shareholders through whatever price adjustment mechanism is agreed) over £100,000. Compare that to an employee who wants the same amount but through EMI Options, as the rate of tax could be 10% (assuming the employee qualifies for Entrepreneurs Relief) that could cost the shareholders as little as £55,000 and perhaps even less with other offsets and reliefs.
Discussing EMI Schemes with James Harper, tax adviser at Wilkins Kennedy, he agrees with the tax benefits, commenting
“Granting employees EMI options is a fantastic way for companies to reward and motivate valuable members of staff without giving away an immediate stake in the company.
From a taxation perspective, under the EMI rules it is usually possible to agree a low price for the shares with HMRC. The employee will not be subject to income tax on the grant or exercise of the options (and acquisition of the shares) providing the agreed price is paid. Taxation will only become payable on the eventual sale of the shares, which providing certain criteria is met, can be as little as 10%. In addition the company can benefit from a corporation tax deduction in the year of exercise being the difference between the market value of the option and the amount the employee paid for the option.
On numerous sale transactions our clients have benefited from the fantastic tax benefits connected to EMI share options leading to an increased return for both the option holders and original shareholders”
Whilst employers could implement a standard scheme formed from precedent documents and this would be relatively cheap, in my experience most standard schemes do not maximise the benefits of the ultimate flexibility permitted by the EMI legalisation.
From a highly bespoke scheme, you can attach any of the following and more:-
I would be happy to discuss these benefits until I am blue in the face but whilst good advisers may not be the cheapest, EMI Schemes that are highly bespoke maximise the incentive (which is likely to maximise an employee’s wiliness to perform and increase value) and deal with every possible circumstance between grant, exercise and sale. Dare I say it, if you want an EMI Scheme to work in a particular way, then a good adviser can usually achieve it.
In my view it is better to implement an EMI Scheme that fits the requirement rather than implement a cheap scheme that would serve as no incentive at all, and essentially be a waste of time and money.
Shareholder or not
EMI Schemes can allow for exercise before or on exit, and therefore the employer can decide if they want the employee to have the opportunity to be a shareholder, or benefit only on exit.
If the EMI Scheme allows for exercise before an exit, then new Articles of Association and a Shareholders’ Agreement can be put in place to protect the existing shareholders, or alternatively those documents can be made a conditions precedent of exercise, meaning that the cost can be avoided until there is certainty that they will be exercised.
We would expect the Articles of Association and Shareholders’ Agreement to deal with things such as mandatory transfer provisions, valuation and drag along rights.
Employees want to feel included, and that they are benefitting from their hard work. EMI Options allow employers to achieve that, whilst also protecting existing shareholders from giving away value without receiving the benefits.
Being included provides an incentive not to leave which, with an EMI Scheme in place, would mean the employee giving up the EMI Options given to them.
EMI Schemes have many benefits, more than can be told in this simple note, so if you are thinking of implementing an employee bonus or incentive scheme do get in touch.