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Martin Mann of Chiltern Tax Support for Professionals Ltd provides an overview of a popular form of approved share scheme, and highlights recent changes to the tax rules.   

Chiltern

Introduction

An important change is on the way in relation to the use of Enterprise Management Incentives ("EMI"). This change particularly impacts companies that employ more than 250 people. We have identified that companies operating in the leisure, hospitality and retail sectors will be particularly hard hit.

What is EMI?

It is the most tax efficient share plan HMRC has ever introduced. It enables employers to grant share options to their employees without any charge to income tax or NIC whilst still retaining the ability to achieve a corporation tax deduction on exercise. EMI is intended for entrepreneurial, high growth companies and is used by such companies as a means to motivate and retain high performers, enable competitive recruitment, prepare management succession and to give senior managers a degree of "insurance" against the adverse effects of a potential future takeover. As such it is a very valuable tool.

What is happening to EMI?

You may recall that, in the Budget, a package of measures affecting EMI was announced. The good news is that the limit on the value of options that may be held by an employee has been increased from £100,000 to £120,000. This change is already effective.

The bad news, however, is that the rules are also to be changed (effective from the date of Royal Assent to the Finance Bill - expected in July) so as to make any company with over 250 employees cease to qualify for EMI. This change will prevent them using EMI going forward (existing options granted prior to Royal Assent will not be affected).

This change (introduced to comply with European rules on state aid) is biting very harshly against any companies with large numbers of employees. Sectors that will be hit particularly hard are the leisure and retail sectors - many of these companies clearly fall within the desired government aims for EMI (being entrepreneurial and high growth) but now will cease to be able to take advantage of EMI - simply because the nature of these businesses is such that the employee base is (of necessity) large.

What should employers do?

There are two things employers need to be told about:

• First, there is a window of opportunity to make a last EMI grant before Royal Assent (or even implement a new scheme from scratch). This could be very valuable - and it would be a shame to miss the window just because a company usually grants in the autumn (for example). Due to the odd way the legislation works, the lifting of the limits on grant from £100,000 to £120,000 make this window even more attractive. Some employers who would have been prohibited from granting any more options to an employee can now grant an additional £120,000 to that employee (i.e. not just an additional £20,000).
• Secondly, when EMI ends for these companies, there is a serious question about what they should replace it with. There are some alternatives for companies that cease to qualify for EMI that maintain the attractive 18% tax rate and avoid income tax and NIC costs. Planning for this now will help to manage employee expectations.

Martin Mann is a senior tax consultant with Chiltern Tax Support for Professionals Ltd Martin.mann@chilterntsp.co.uk