The Enterprise Management Incentive (EMI) Scheme: Empowering Start-ups and Small Businesses

For start-ups and small businesses looking to attract, retain, and incentivise top talent, the Enterprise Management Incentive (EMI) scheme can be a powerful tool. Introduced by the UK government, the EMI scheme provides tax-advantaged share options that allow companies to reward and motivate key employees.

In this blog post, we’ll explore what the EMI scheme is, how it works, and when it might be the right choice for your business.

What is the Enterprise Management Incentive (EMI) Scheme?

The Enterprise Management Incentive (EMI) scheme is a tax-advantaged share option plan that allows qualifying small and medium-sized enterprises (SMEs) to grant share options to their employees. These options give the employees the right to acquire shares in the company at a pre-determined price, known as the exercise price.

The key benefits of the EMI scheme include:

Tax Advantages:

• Income tax or National Insurance Contributions (NICs) may not be payable when the options are granted or exercised, provided certain conditions are met.
• Any gains realised when the shares are eventually sold may be subject to capital gains tax (CGT) rather than income tax, which is often more favourable.

Flexibility:

• Companies can choose the employees who will receive the options, the number of options granted, and the exercise price.
• Options can be granted with a vesting schedule, encouraging employees to remain with the company.

Attracting and Retaining Talent:

• The tax benefits make EMI options a valuable form of remuneration, helping companies compete for top talent.
• Employees become invested in the company’s success, aligning their interests with those of the business.

Eligibility Requirements for the EMI Scheme

To qualify for the EMI scheme, both the company and the employee must meet certain criteria:

Company Eligibility:

• The company must be an independent trading company with fewer than 250 full-time employees and gross assets of less than £30 million at the time the EMI option is granted.
• The company must be carrying on a qualifying trade or be preparing to do so, such as manufacturing, retail, or professional services.
• The company must be UK-resident and must have a UK permanent establishment and not be listed on a recognised stock exchange.

Employee Eligibility:

• The employee must be a full-time working director or employee of the company.
• The employee must not hold more than 30% of the company’s share capital.
• The employee must not have a material interest in a close company that is the parent company of the granting company.

Using the EMI Scheme: When Might It Be Appropriate?

The EMI scheme can be particularly beneficial for start-ups and small businesses in the following situations:

1. Attracting and Retaining Key Talent:
   • Start-ups and small businesses often struggle to compete with larger companies when it comes to salary and benefits. The EMI scheme can help level the playing field by offering a unique and valuable form of remuneration.

By granting EMI options, companies can incentivise employees to stay with the business and share in its growth and success.

2. Preserving Cash Flow:
   • Start-ups and small businesses often have limited cash resources, making it challenging to offer competitive salaries. The EMI scheme allows companies to provide equity-based remuneration without immediate cash outlay.
   • This can be especially useful during the early stages of a business, when cash is tight, but the company needs to attract and retain top talent.

3. Aligning Interests:

• • The EMI scheme helps to align the interests of employees with those of the company. By granting options, employees become invested in the success of the business, as their potential gains are directly tied to the company’s performance.
  • This can foster a greater sense of ownership and commitment among employees, leading to increased motivation and productivity.

4. Facilitating Future Financing or Exit:
   • The EMI scheme can make a company more attractive to potential investors or acquirers. Offering EMI options demonstrates that the company has a well-structured incentive plan in place, which can be a valuable asset during fundraising or exit negotiations.
   • Investors and acquirers often view EMI schemes as a sign of a well-managed and forward-thinking business.

5. Succession Planning:
   • For family-owned businesses or those with a long-term management team, the EMI scheme can be used as part of a succession plan. By granting options to key employees, the business can ensure a smooth transition of leadership and ownership.
   • This can help to retain and incentivise the next generation of leaders, ensuring the continued success of the company.

Implementing the EMI Scheme: Key Considerations

While the EMI scheme can be a powerful tool for start-ups and small businesses, there are several important considerations to keep in mind:

1. Seek Professional Advice: Navigating the eligibility requirements and tax implications of the EMI scheme can be complex. It’s advisable to consult with a qualified accountant or legal advisor to ensure compliance and maximise the benefits.

2. Develop a Robust Option Plan: Companies should carefully design their EMI option plan, including vesting schedules, exercise prices, and the selection of eligible employees. This requires a thorough understanding of the scheme’s rules and the company’s long-term goals.

3. Communicate Effectively: Clear communication with employees about the EMI scheme, its benefits, and the company’s expectations can help to ensure buy-in and engagement.

4. Monitor and Adapt: – As the business evolves, the EMI scheme may need to be reviewed and adjusted to continue meeting the company’s needs and the employee’s expectations.

By understanding the Enterprise Management Incentive scheme and considering its potential benefits, start-ups and small businesses can leverage this powerful tool to attract, retain, and incentivise the talent they need to thrive.

For more information contact Ballards LLP at 01905 794 504

Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.