Having enjoyed (I hope) our detour from my consideration of share schemes
to look at the Child Trust Fund and Saving Gateway, I would now like to
return to the Enterprise Management Incentives scheme, the latest
Government tax-incentivised scheme to encourage wider share ownership.
In previous articles, I have looked at, among other things, the nature and
extent of the tax relief available, the types of company the shares in
which can qualify for the EMI scheme and the trading activities that will
qualify. As for venture capital trusts, what trading activities qualify
are, in effect, defined by the list of trades that are excluded activities.
The next key issue to consider is that concerning which employees are
eligible to participate in an EMI. An individual is an eligible employee in
relation to a relevant company if he or she meets three requirements.
The first requirement is with regard to employment. An employee is an
eligible employee in relation to a relevant company if he or she is an
employee of the company or a qualifying subsidiary.
The second is in connection with working time. The employee must work at
least 25 hours a week for the company or, if less, devote 75 per cent of
his working time to the company.
Third, the employee or his associates must not have the beneficial
ownership of or the ability to control, directly or indirectly, more than
30 per cent of the ordinary share capital of the company (whether close or
This last test means that substantial shareholders, which would cover most
“owner-managers”, cannot benefit from the EMI scheme. The “indirectly” part
of the condition rules out splitting shares around the close family to
avoid exclusion from the EMI.
The tax incentives are substantially focused on income tax. The value of
income tax incentives in relation to share schemes is proven and is
particularly valuable, given the potential for income tax liabilities on
share schemes that are not approved.
So what is the nature of the income tax incentives?
There will be no income tax charge in respect of any grant, or on exercise
of share options under the EMI in the period of ten years from the date of
grant of the option.
Where options are granted at less than market value at the date of the
grant there will be an income tax charge on exercise based on the amount by
which the market value at grant exceeds the amount paid for the shares,
that is, the discount is taxed.
A qualifying option will cease to qualify on the happening of a
disqualifying event. Disqualifying events include the following:
The company becoming a 51 per cent subsidiary (subject to relief in
certain cases for a qualifying share exchange).
Ceasing to meet the trading activities test.
The employee ceasing to be an eligible employee.
Variations made to the terms of the option which increase the market value
of the shares.
The grant of options which throw the employee over the £100,000 limit
(including unexercised options under company share option plans).
There are, as for any tax incentive scheme, some administrative provisions.
The Inland Revenue may require any person to provide them with such
information as they think necessary to decide whether an option is a
qualifying option. A company which has any outstanding qualifying options
in a tax year must deliver a return to the Inland Revenue. In the event of
a disagreement about market value, the employer company may appeal to the
Commissioners of Inland Revenue.
In my column next week I will continue this look at EMI by taking an
example of how the tax situation could work.