Recruitment businesses are increasingly turning to share awards or share options to attract, incentivise and retain their recruitment professionals – particularly in a way that enables them to participate in a future sale of the company. If structured correctly, these employee benefits can assist employees to identify more closely with the future objectives of the business and can be an effective way of focusing management's efforts in contemplation of that future sale.
The clear share option scheme of choice is an enterprise management incentives scheme (EMI). This is because an EMI scheme offers something that no other share option scheme currently does. A triple benefit of significant tax advantages, flexibility in its structure and terms, and cost-effective to set up and administer.
An EMI scheme is therefore very popular with recruitment companies, whether they are start-ups looking to compensate staff, for a lack of available cash, or more established companies planning for the future.
Essentially, an EMI scheme enables employers to give their employees the option of acquiring shares in the future at an exercise price set at the date the option is granted.
To qualify, a company must be an independent trading company (so not under the control of others), the gross assets of the company (or group) must not exceed £30 million, and the employees of the company (or group) must be less than the equivalent of 250 full-time employees. Certain trading activities will not qualify; but the good news is, recruitment companies do. However, participants must be either employees or employed directors working at least 25 hours per week (or, if less, 75% of their working time) for the company (or group) and cannot receive more than £250,000 worth of shares valued at the time the option is granted. Otherwise, EMI options can be offered to selected employees, to each such employee on different terms, and there are very few limits on the types of exercise or performance conditions that can be attached. Recruitment companies can therefore use this as a means to retain employees, particularly by including employment conditions such as restrictive covenants. The potential loss of options can act as a powerful disincentive to employees who might otherwise look to exit the business and join a competitor.
An EMI scheme offers fantastic tax benefits both to the employee and the employing company. For the employee, no income tax (IT) or National Insurance contributions (NICs) are payable on the grant or exercise of the option if the exercise price is set at no lower than the market value agreed with HMRC at grant. Instead, the employee will only be charged capital gains tax (CGT) on the increase in value over the exercise price, when the shares are sold at a preferential CGT rate of 10% – provided that the employee was granted the option at least 12 months prior to sale and has been an employee throughout that 12-month period. The employee may also reduce the gain for CGT purposes by offsetting any unused CGT annual exemption (currently £11,100 for the 2015/16 tax year).
As an example:
If an employee was simply gifted £100,000 in cash, they would be charged up to £45,000 of IT immediately under PAYE and there would be employee’s and employer’s NICs to pay on the gain too, meaning they might only keep less than £55,000. If, instead, the employee received the £100,000 gain from the sale of shares acquired via an EMI scheme (granted at least 12 months earlier), then the employee would pay just £10,000 of CGT or (if the CGT annual exemption is available) just £8,890, meaning they might keep over £91,000. Consequently, using an EMI scheme gives the employee an additional benefit of over £36,000 in this example.
For the employer, the costs of setting up and administering an EMI scheme will be a deductible expense for corporation tax. In addition, the employer can obtain a corporation tax deduction equivalent to the gains made by employees exercising EMI options against its own profits chargeable to corporation tax. This can provide significant tax relief for the employer with no equivalent cash outlay.
If you would like to find out more about the possibility of implementing an EMI scheme for your business, please contact Michelle Last.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.