Businesses have been reminded of a change in a share option scheme that enables companies to attract and keep key staff by rewarding them with a share of the business.

The Enterprise Management Incentive (EMI) offers generous tax incentives and can help smaller companies, who might not be able to match salaries paid by bigger firms, keep valued staff.

During the pandemic, HMRC extended the period for which an agreed valuation of shares to be used for EMI options remained valid, assuming no material changes occurred during the meantime, from 90 days to 120 days.

That period will revert to 90 days at the end of the year, and from 1 December, agreements issued on or after that date will be valid for 90 days only.

The tax authority has ruled that when agreeing on an EMI valuation, it is with the provision that no changes were made before the granting of the options that could affect the accepted value.

According to HMRC, these could include:

• Any change (completed or actively contemplated) in the share or loan capital of the company
• Any arm’s length transactions (completed or actively contemplated) involving shares of the company
• Negotiations or preparations for flotation or takeover
• Any declaration of a dividend on any class of shares in the company
• The publication by the company of any new financial information, for example, the annual accounts or interim results or announcements.

Companies can grant share options up to the value of £250,000 in a three years. For many start-up firms which need specialist staff, it is a way to reward them and keep them loyal as the business grows.

What are the benefits of EMIs?

This will allow employees to sell the shares and make quite tidy profits. These could of course be subject to Capital Gains Tax.

How does it work?

A company with assets of £30 million or less may be able to offer Enterprise Management Incentives (EMIs).

• There will be no Income Tax or National Insurance if the shares are bought for at least the market value they had before being granted the option.
• Income tax and National Insurance become payable if there was a previous discount on the market value of the shares, which equates to paying the difference between what was paid and what the shares were worth.

Not all businesses can qualify for the EMI, and HMRC says that those excluded include:

• Banking
• Farming
• Property development
• Provision of legal services
• Ship building.

For help and advice on taxation matters, please call us today.