Motivating Staff – The Cash Free Way?

With all the talk of a credit crunch, most companies are keeping a wary eye on expenditure and are looking for ways to stretch their money further.

If you’re an employer, you still need to keep your employees motivated and rewarded. Luckily, there is a way of incentivising key employees, without having to dip into the coffers.

Using Enterprise Management Incentives, or EMI options, is a tax-efficient way of granting options over shares in your company to certain employees. You don’t need to pay out any cash – but if your business is sold, your most important employees can share some of the financial success that they have worked for.

Furthermore a recent change in the law has increased the value of shares over which options can be granted from £100,000 to £120,000 to each key employee”.

How EMI options work

The option gives the optionholder the opportunity to buy shares in the future at a price fixed today. So if you grant options today at £1.00 per share, and the share’s value increases to £10, the optionholder can then buy a share worth £10 for only £1.00.

Usually, there is income tax and National Insurance contributions to pay on the £9.00 difference. But the EMI rules mean there is no tax to pay when the option is exercised.

Tax will only be due when the shares are sold, at the new 18% flat rate for capital gains. Remember though the annual capital gains tax exemption of £9,600 means there could be no tax to pay at all.

Is EMI for you?

Here are some common questions which might help you decide:

Can any company grant EMI options?

Many companies can grant EMI options, as long as they are independent, under a certain size, and don’t carry out certain property and finance related trades. From July EMI companies must employ 250 or fewer full-time staff. Advance clearance can be obtained from HMRC for comfort in this area.

Which employees can receive EMI options?

Any employee who works at least 25 hours a week and doesn’t already own (together with his relatives) more than 30% of the company’s shares.

I don’t want to give control away to my employees

You don’t need to. Your employees won’t get shares until they exercise the options. You decide when they can exercise the options at the time you make the grant. For many private companies, optionholders won’t be able to exercise until the business is sold.

What happens if an employee optionholder leaves?

An option agreement sets out all the details of the option, including what happens if an employee leaves. Usually, employees who leave lose their share options.

How do I know what my company’s shares are worth?

You can agree a value for your company’s shares with HM Revenue & Customs (HMRC). We, or your accountant, can help you with this.

What are the tax benefits for my business?

There will usually be a corporation tax deduction on the exercise of the option, based on the increased value of the share. The costs of setting up an EMI arrangement are also tax deductible.

What next?

For more information, contact Sarah Anderson at Foot Anstey Solicitors on 01752 675105 or by email sarah.anderson@foot-ansteys.co.uk

Published 07/07/2008. The author of this article is Sarah Anderson