Options for key employee recruitment and retention

One of the largest headaches for many businesses is recruiting and retaining key managers and high calibre employees. Successfully hiring and retaining the right people can make the difference between the business owner being bogged down in day to day operational matters, or having the time to consider and make the big strategic decisions to allow the business to grow and move forward.

These difficulties are recognised by the tax legislation and a possible solution is offered in the form of the ‘Enterprise Management Incentive (EMI)’ scheme. These rules allow the use of a tax privileged share option system for qualifying companies to offer key employees shares in the company at a discount.

We are often asked by clients, when discussing schemes which involve employee share ownership or dilution of the business ownership, ‘why would I give up part of my business?’. The answer lies in whether the aim of the owner is to create a business to simply generate an income, or create an organisation with value over and above that brought by the skills of the owner. Is the aim to own all of a small cake or a smaller slice of a far larger cake?

An EMI option works by granting the employee an option to acquire, usually newly issued, shares in the company. The most common format would be for the option price to be the current value and the option period up to ten years. This gives the employee the ability to acquire the shares at today’s value any time in the next ten years. It would be hoped the employee would endeavour to promote and develop the business to maximise the value of the business and therefore the ‘discount’ being received on the shares they will acquire. The shareholding of the business owner does of course also grow at the same time!

There is a tax benefit to the employee. Under a non HMRC approved arrangement, an Income Tax charge would arise on the employee in relation to any shares issued at undervalue. No Income Tax charge will usually arise on a correctly implemented EMI option. The company does however obtain the added bonus of a tax deduction based on the tax that would have arisen had the option not been approved under the EMI scheme.

EMIs are available only to limited companies and there are various qualifying criteria in relation to the company, shares and employee. Qualifying companies with fewer than 250 employees may provide employees with share options worth up to £250,000 per employee, up to an overall maximum of £3 million. The use of EMIs can also be very effective in providing a succession plan for the business, by allowing key employees to acquire an interest in the business over a period of time.

The suitability of an EMI options scheme will depend on the specific circumstances and strategy of the business. Should you require any guidance as to the potential uses for your business, or any other tax matters, Mark Thompson of Rennie Welch LLP can be contacted on (01573) 224391 or mark.thompson@renniewelch.co.uk