Covid-19: Should you be considering EMI schemes at this time?

Tuesday 28 April 2020

Enterprise Management Incentives (EMI) share schemes are tax-advantageous schemes used by qualifying companies to incentivise and retain key employees.

As Covid-19 and future economic uncertainty result in a significant drop in turnover for many businesses, companies will continue to face difficult decisions around retaining staff.

Is this the right time to consider implementing an EMI scheme?

Some companies have turned to EMI schemes as an alternative means of remunerating employees who have been asked to take pay cuts, or as a reward in place of bonuses.

At this time, an EMI scheme could also help foster a more collaborative business culture where key employees really do feel they are “in it together” with owners.

EMI Overview

We have touched on EMI schemes and their advantages and disadvantages in a recent blog, you can read here.

EMI schemes are one of the most tax-efficient ways to incentivise employees, with savings in tax for both the company and employees, however the eligibility criteria can be difficult to satisfy.

Broadly, some of the key qualifying criteria include:

• Purpose – an EMI scheme must be granted in order to retain and recruit employees. The main purpose (or one of the main purposes) cannot be to avoid tax.
• Assets – a company’s (or if the company is a parent company, the group’s) gross assets must not exceed £30 million.
• Number of Employees – a company or group must have less than 250 full-time employees (we can provide guidance on the definition of “full-time employee”).
• Independence requirement – broadly, a company must not be a 51% subsidiary or under the control of another company (although there are exceptions for qualifying subsidiaries and companies subject to an employee-ownership trust).
• Purpose of trading and excluded activities – a company must exist for the purposes of trading. Certain activities are excluded from the EMI scheme including banking and insurance, dealing in land, property development, farming and operating hotels or care homes.

In the Spring Budget 2020 (which seems a very long time ago) the Chancellor announced that the government would review the EMI structure to ensure it provides support for high growth companies to recruit and retain talent.  This suggests the government is considering less restrictive criteria.

Covid-19’s effect on existing schemes

Covid-19 has thrown up some issues for existing options:

• how will the pandemic affect share values in existing schemes?; and
• what effect will furloughing an employee have on their share options?

Companies should certainly consider the share values under existing schemes given the economic impact of Covid-19 as this could affect future tax liabilities.

Secondly, furloughing an employee who is an option holder under an existing scheme could be considered a disqualifying event since an employee is subject to a requirement to work in the business for a certain number for hours. This issue has been raised with HMRC and it is hoped a concession will be forthcoming.

Business owners with existing schemes should certainly discuss any potential impact with their financial and legal advisers.

If you are interested in setting up an EMI scheme as an alternative way of rewarding or incentivising staff, or have any questions regarding existing EMI schemes, please email or call our Corporate and Commercial team on 0113 207 0000. We will be happy to discuss the suitability of such a scheme for your business.