It's not easy. That is putting it mildly. It is very hard for any business to plan coherently in the current climate. But equally most businesses remain as keen as ever to retain and motivate their best staff.

As a result, one thing we are seeing a steep rise in, is businesses looking at granting share options to employees as a means of achieving that motivation and giving them a stake in the long term growth and value of the business.

Which type of share scheme?

There is a variety of different employee share option schemes, but the one that seems most popular just at the moment is EMI options. EMI stands for "Enterprise Management Incentive". It's nothing to do with the record company.

The vast majority of private businesses are likely to meet the requirements for being able to issue EMI options.

What are the benefits of EMI options?

The benefits are tax related. If properly granted:

  • the employee pays no tax on the grant of an EMI option to them
  • the employee pays no tax when they exercise the option and acquire the shares
  • the employee only pays capital gains tax (so no PAYE and no NICs) when they sell the shares
  • the company obtains a corporation tax saving when the employee sells the shares

In most cases if the company and the shareholder qualify, entrepreneurs' relief will be available for the employee when they sell, reducing the rate of tax on gains on sale up to £1 million to just 10%.

Which sort of business qualifies?

Assuming your business is UK based and run through a private limited company, then as long as that company:

  • has gross assets of less than £30 million 
  • is not a subsidiary of another company
  • is not an investment business and
  • has fewer than 250 full time employees 

it should be OK.

The rules are more detailed than that and you would need to discuss those with your legal advisor but that is the overall picture.

Which employees can obtain EMI options?

Any employee who works at least 25 hours a week or at least three quarters of their total working time (however low that working time is) is eligible to be granted an EMI option. Non executives are not eligible.

You don't have to grant every employee an EMI option and in practice it is unusual to do so.

EMI options are really designed to be given to key employees. Indeed originally under the EMI rules they would only be given to key employees, but that is no longer the case.

Typically only a few more senior employees will be granted EMI options – for example the MD, the sales director, the marketing director, the operations director and the finance director.

Why now?

Quite simply the costs of putting in place an EMI option are low; it doesn't involve actually paying the employee any money (at a time when money is tight); the long term incentive is potentially very significant and, crucially, now may be a good time to agree the value of the business, and therefore the shares, with HMRC.

What does that mean?

Typically EMI share options can only be "exercised" when the business is sold. That doesn't have to be the case. But it is very common.

What that means is that the employee doesn't actually own the shares unless and until there is a sale. If a sale does happen then the employee "exercises" the option, acquires the shares and immediately sells them on, making a profit (hopefully).

But any share has to be paid for. And when the employee "exercises" the option they must pay for them (taking the payment out of the sale proceeds).

The price that the employee pays has to be set when the option is granted (i.e. now).

But if that price undervalues the shares, then your company (as the employer) will be treated as giving the employee a benefit equal to the difference between the true value of the shares and the price payable. And, in due course, the employee will pay income tax on that (probably through the PAYE scheme, so NICs as well).

Most companies and employees wish to avoid a PAYE & NIC charge.

In order to avoid that charge it is routine, when an EMI option is granted, to agree the value of the shares in question with HMRC. If the value is agreed in this way, the PAYE & NIC risk should be avoided assuming all other requirements are met.

Usually the employer and the employee want to agree the lowest reasonable possible value for the shares.

At present the assumption is that HMRC will accept that, because of the coronavirus crisis, it is very hard to place any value on most businesses. So employers are hoping that the value agreed for EMI shares at the moment will be low. And it is undoubtedly true that, for most business, past performance is, at the moment, definitely no guarantee or indicator of future performance.

Conclusion and benefits

So with the value of many businesses currently depressed we find that a lot of clients see this as a perfect opportunity to grant employees EMI options.

This has numbers of benefits:

  • it aligns the interests of those employees with the interests of the shareholders
  • at present that can probably be done at a modest value
  • it incentivises the employees to grow the business and to remain with it during that growth period
  • it enables the employees to share in that growth in value in due course

Of course any approach to HMRC regarding the value of shares for EMI purposes must be rooted in reality and it remains to be seen what approach HMRC will take overall. But with the rhetoric from the Government being about encouraging and facilitating business growth, it seems fair to assume that a pragmatic, commercially minded approach is likely.