Attracting and retaining key staff: the role of the Enterprise Management Incentive scheme

The labour market in the economic hubs of London and the South East remains tight. Stiff competition for in-demand skilled professionals is reflected in salaries and the ease with which business-critical employees can move from one job to another. Businesses need to think creatively and use every tool available to them to attract and retain the best people.

Fast-growth businesses recognise that in today’s competitive landscape salary alone is rarely enough to attract and keep the people needed to ensure long-term growth. Yes, it remains important, but a range of incentives are needed.

Enterprise Management Incentive schemes (EMIs) are increasingly the vital ingredient, not least because of the generous tax benefits they offer both employees and their employers but also as a tool for fostering employee loyalty and commitment. However, a word of caution - they do not work for every business.

An EMI is a share option scheme that allows businesses to offer employees the option to acquire shares at a future date, at a predetermined price which is also typically agreed with HMRC in advance. Put simply, they offer employees a route to part-ownership of the business, aligning their interests with the long-term success of the company so they can benefit financially in the future, typically when a business is sold.

The argument follows that key employees with a vested interest in the business will be more motivated and loyal to their employer with the promise of a potentially sizeable windfall. The preferential tax position to both the business and employees has added to their appeal.

Employers benefit in three ways: there is no tax cost to the business on set up, no employers' National Insurance Contributions on the grant or exercise of the options, and there is Corporation Tax relief on the difference between the market value of the shares when the shares are acquired and when the option was granted. This can represent a significant windfall for business owners when a business is sold.

For employees, a significant benefit is the tax treatment when they sell the shares in the future. Provided the purchase price of the option matches the HMRC-agreed valuation, the difference between this purchase price and the eventual sale price of the shares is subject to Capital Gains Tax (CGT). Typically, this tax is levied at 10% on the first £1 million of any taxable gain, which then reverts to the standard 20% CGT rate. This favourable rate applies on the condition that the employee has maintained ownership of both the option and the shares for a combined minimum period of 24 months.

EMI schemes do come with strict qualifying criteria. It is open only to businesses with less than 250 employees, gross assets under £30 million, must be actively trading and have a permanent base in the UK.

For employees to qualify, they must be legally employed, work 25 hours a week or have 75% of their working time as an employee or director of that business. They cannot hold more than 30% of the company’s shares.

There are, however, some notable exclusions to the types of business that qualify for EMI schemes. Property developers, farming businesses, banking and financial services, legal and accountancy firms, and shipbuilding are all excluded from participating in EMI schemes.

Family-owned businesses

According to the 'State of the Nation' report by Oxford Economics, a prominent forecasting and analysis firm, there are over five million family-owned businesses in the UK, employing 14.2 million people contributing £637 billion to the UK economy.

Despite facing similar challenges, competing in the same talent pools, and with the same pressure on costs, family businesses find themselves largely excluded from the benefits of EMI share schemes. This is typically driven by the lack of any prospective future sale or the desire to avoid diluting ownership outside the family circle.

Unfortunately, for such businesses, alternatives that offer comparable advantages to EMI share schemes do not exist. Most alternative incentives result in employee benefits being subject to PAYE and National Insurance at significantly higher rates than CGT rates.

Family-owned businesses play a valuable role in the UK economy yet EMIs are effectively closed to them given the commercial desire to prevent dilution of ownership outside the family group. It is perhaps time that the government consider an innovative staff incentive landscape that could give a welcomed boost to the engines of the economy.

For more information, please contact one of our Business Tax team members.