EMI Schemes for Tech Businesses
Retaining and Motivating Your Key Staff
Despite the drop in levels of venture capital investment, the UK remains a thriving hub for tech companies. The abundance of world-class tech talent in the UK makes it an attractive location for tech startups and also established businesses. However, retaining and motivating key employees in this competitive market can be challenging and costly. One popular way to motivate and reward key employees is through the use of Enterprise Management Incentive (EMI) schemes. This offers tech businesses the opportunity to align their employees’ interests with the company’s growth while enjoying significant tax advantages.
Who do EMI Schemes benefit?
EMI’s benefit both the employees and employers. They’re share option schemes designed to incentivise and retain employees while offering significant tax benefits. Companies can grant share options to employees, giving them the opportunity to purchase shares at a predetermined price in the future.
This equity-based approach is particularly valuable for early-stage tech companies who are looking to scale their business, but may not have the resources to offer high salaries to compete with and attract employees from the big tech firms in the UK.
How do EMI Schemes Work?
EMI schemes align employees’ interests with the company’s success, and so mirror the incentives of shareholders. Here’s an overview of how they work:
- Share options are granted to selected employees – despite the grants, employees aren’t required to pay anything but they also won’t actually become shareholders until they exercise the option. Both the exercise price and event will be detailed within the option grants.
- An exercise event takes place – this is common for EMI schemes, within the tech industry, the exercise event will be a company exit, such as the full sale of the business or a share listing. However, it’s possible for other time or performance-based milestones to be selected as the exercise event, dependent on the company’s objectives.
- Options are exercised – once this exercise event takes place, the option holders can exercise their option and buy the shares for the pre-determined exercise price. If there’s an exit and a third party buys the employee’s shares immediately, the employee will be entitled to their share of the sale proceeds after deducting the exercise price.
Tax Implications
Understanding the tax implications of EMI schemes is crucial for both employers and employees. Here’s a brief overview:
- Grant of the option – No tax or NIC is payable when options are granted to the employees.
- Exercise of the option – when the exercise price is at least as much as the market value of the options being granted, no tax or NIC is payable. But, if the exercise price is less than the market value, tax will be payable.
- Capital Gains Tax (CGT) – when the employees actually sell their EMI-acquired shares, they may incur CGT charges. This is subject to allowances, exemptions and reliefs. You can read more about CGT in our blog here.
- Additionally, corporations may benefit from tax relief when employees exercise EMI options, further enhancing the scheme’s appeal.
This is just a general overview, and exceptions can still apply. For more information, speak to an expert.
Setting up your EMI scheme
One of the key advantages of EMI schemes is their flexibility in defining exercise events, allowing companies to tailor them to specific goals or performance metrics.
However, implementing an EMI scheme requires thorough planning, documentation, and compliance with HMRC regulations, making expert advice essential. There’s plenty of other considerations to take into account when setting up an EMI scheme such as disqualifying events, bad/good leaver reasons, and eligibility criteria and limits, and so expert advice should always be sought.
EMI schemes offer tech companies a powerful tool for attracting, retaining, and motivating key employees while enjoying substantial tax advantages.
However, implementing an EMI scheme involves various considerations, from selecting the right scheme to crafting specific components tailored to your business’s needs. It should be noted that this isn’t a one-off implementation exercise and so there are annual compliance requirements too.
To see how TC Group can support your tech business with tax advice and guidance on EMI schemes, get in touch for a free initial consultation with our Tech & Media sector specialists.