EMI Scheme For Construction Companies
I’ve been asked to provide details of how we can support our construction clients and their businesses in 2022. We work very closely with all our clients, including our construction clients and, as I’m sure they will agree, we have supported them and worked very closely with them during the “COVID” years, keeping them up to date with any changes in legislation, the most recent being the change to the VAT rules with the introduction of the VAT domestic reverse charge. One point that regularly comes up in meetings, and is not always on our construction client’s radar, is the use of the enterprise management incentive scheme to retain, incentivise and reward key employees and workers.
Under an EMI scheme, an employer can grant an option to employees to buy shares in the company at today’s price, with significant discounts, which may have a higher value when the option is exercised. This may be on a future sale of the company or on the completion of certain long-term targets that result in substantial growth of the company. The employees benefit from a substantial return which is potentially taxed at 10% rather than the significantly higher rates of income tax (maximum being 45%) if those funds had been received as a bonus. The option must be exercised within 10 years to receive tax advantages. Now is the perfect time to take advantage of this scheme, especially if the current market value of your business has been negatively impacted by the effect of COVID-19 on your trading results, which will benefit your employees.
You can read more about Enterprise Management Incentives here Tax and Employee Share Schemes: Enterprise Management Incentives (EMIs) - GOV.UK (www.gov.uk)
Terms and Conditions for EMIs
For the company to qualify it must be a trading company or a holding company of a trading group, the gross assets cannot exceed £30m and they must have fewer than 250 (“full-time equivalent”) employees. The company must be independent (i.e. not a subsidiary), not carry out an “excluded trade” and not have EMI options in issue with a value on the date of grant of more than £3m. There are also certain requirements with regards to having a permanent establishment in the UK and all subsidiaries being qualifying subsidiaries.
Employee - there is no income tax or national insurance payable on the grant of an EMI option provided the option is exercised no later than ten years from the date of its grant and the option was granted with an exercise price at or above the market value of the shares at the time of grant.
Company - the cost of setting up and administering the scheme is a deductible expense for corporation tax purposes. Furthermore, a corporation tax deduction might normally be expected to accrue equally to the employee’s ‘gain’ on exercise.
When Shares Are Sold
Capital Gains Tax will be payable on the disposal of the shares. Provided the scheme has been operated correctly and the value of the company increases, individuals will face a capital gains tax liability at the time that they sell their shares. Where the option has been granted at full market value, the chargeable gain will (at its simplest) represent the difference between proceeds and cost.
Where the grant took place at a discount, the gain chargeable to CGT will, essentially, be calculated on the difference between (a) the sale proceeds and (b) the cost plus the amount on which income tax has already been paid or is payable on acquisition of the shares, upon option exercise. In most cases, this amount charged to income tax will be calculated by reference to the market value of the shares at the date that the option was granted.
Business Asset Disposal Relief (a reduced rate of Capital Gains Tax)
Business asset disposal relief is available if the following conditions are met:
- The EMI option was granted at least two years before the disposal;
- Throughout the period of two years ending with the disposal, the company was either a trading company or the holding company of a trading group; and
- Throughout the period of two years ending with the disposal, the individual is an officer or employee of the company (or one of more companies in the same trading group).
This reduces the effective rate of tax on any gain (the difference between the price paid on exercise and the sum received on sale) to 10% on the first £1,000,000 of gain. Thereafter, the capital gains tax rate is 20%.
The below will mean that a company no longer qualifies for EMI:
- A loss of independence
- Company no longer meets the trading requirements
- Employee no longer works for the company
- Employee no longer works the required hours (however see Changes to working time requirements for Enterprise Management Incentives - GOV.UK (www.gov.uk))
- The employee has exceeded the share value limit (the maximum EMI options that an employee can hold amount to £250,000 in any 3-year period)
The time within which EMI options may be exercised following a ‘disqualifying event’, and retain their favourable tax treatment, is 90 days.
- Check the articles of association:
- Ensure that the operation of the EMI scheme is permitted
- Can new classes of shares be issued
- Whether shares can be restricted for rights to dividends
- Needs to be passed by a special resolution (a 75% majority)
- Record details in the minutes
- Filed to Companies House within 15 days of amendments taking effect
- Carry out a company valuation to ensure that the exercise price is of a true value
- This valuation will need to be approved by HMRC by completing a VAL231 form
- Once agreed, employees will need to be provided with an ‘option agreement’, approved by the board. Important to take minutes at this point as well.
- Notify HMRC within 92 days of the grant of an EMI option for it to qualify under EMI
- Each tax year an annual return will need to be submitted online by 6 July following the end of the tax year
- Instructions must be provided to an employee on how and when the shares can be exercised and how to carry this out