The SME market is often faced with the dilemma of how to recruit and retain high
calibre managers that it recognises that it will need in order to ensure that its business
succeeds.

An extremely useful tax efficient tool to assist in both recruiting and rewarding key
employees is the Enterprise Management Incentive Scheme (EMI). This is an Inland
Revenue approved share option scheme, which as we will see offers benefits in terms
of tax savings both to the employer and the employee.

An SME, for the purposes of EMI, is a company whose gross asset value is below £30
million, and by setting the limit at this level it affords a significant number of
companies the opportunity to set up and benefit from an EMI scheme.

EMI allows options to be granted to eligible employees to acquire shares in the
company up to the market value of £100,000 per employee. The shares in question
must be ordinary fully paid shares that are not redeemable. The company must have
no more than £3m of its shares under EMI options. The options must be exercised
within 10 years of grant.

Benefits to the Employee

Grant -There will be no income tax or National Insurance Contributions due when the
options are first granted.

Exercise - Provided that the option price is not less than full market on grant there will
normally be no income tax or NIC due when they are exercised.

Sale - Capital Gains Tax will be payable on any chargeable gain made when the
shares are sold. However provided that the company remains a qualifying trading
company throughout, business asset taper relief will have accrued from the time the
option was granted. Full business asset taper relief is available where there is a gap of
at least 2 years between the grant of the option and the subsequent sale of shares
acquired under exercise. This effectively means that if the employee is a higher rate
tax payer they will only pay tax at 40% on 25% of the gain, which equates to an
effective rate of tax of 10%.

Benefits to the Employer

The costs of setting up and administering the scheme will be deductible from a
company’s corporation tax profits.

Conditions

As you would expect there are a number of conditions, which need to be met by the
company and the employee.

Company/Group:
• Gross Assets of the company or group must not exceed £30 million.
• Company must be independent and not under the control of another company.
• Any subsidiaries must be at least 75% owned.
• The company or at least one company in the group must be a trading company and
at least one group member must carry on its trading activities wholly or mainly
the UK.
• The trade of the company must not consist of dealing in land, leasing, property
development and financial activities.

If you are already a qualifying company for Enterprise Investment Scheme or Venture
Capital Trust purposes then you will already have met a significant number if not all
of the conditions outlined above.

Employees:
• Must not own 30% or more of the issued share capital of the company
• Be employed by the company or group for at least 25 hours a week, or, if less, for
at least 75% of their working time.

Disqualifying Events

There are certain disqualifying events, which can trigger a withdrawal of tax relief
previously given and these include:
• Where the company ceases to carry on a qualifying trade
• Employee ceases to be an eligible employee

Set up and Reporting Requirements

An EMI Scheme does not require direct Inland Revenue approval.

However before the scheme can start:
• Ideally the market value of the shares at the date the option is granted must be
agreed with Inland Revenue Shares Valuation Division unless the shares are of in
a company which is listed on AIM or OFEX.
• a set of scheme rules need to be drawn up.
• notification must be made to the Inland Revenue within 92 days of the grant of an
option.

There are also separate reporting requirements in the event that a disqualifying event
of the type outlined above takes place.