launchpad enterprise management incentives January 2014 Enterprise management incentives (EMI): General requirements Qualifying companies

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Jordan Powell
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1 launchpad January 2014 enterprise management incentives Enterprise management incentives (EMI) ptins are tax-privileged share ptins available t small and mediumsized trading cmpanies. Share ptins are an imprtant tl in recruitment and retentin strategies and prviding incentives t emplyees. EMI ptins are a flexible frm f share ptin which attract substantial tax benefits fr emplyees and the cmpany and can help create the envirnment fr business success. This chapter prvides an verview f enterprise management incentive ptins. Enterprise management incentives (EMI): Are available t independent trading cmpanies with fewer than 250 emplyees and grss assets nt exceeding 30 millin at the date when the ptin is granted. Allw emplyees t be given tax-advantaged ptins ver shares wrth up t 250,000 each at the time f grant. Ensure that, nrmally, n incme tax r NICs arise when ptins are exercised; and Prvide that, when the resulting shares are sld, any gain shuld nrmally qualify fr capital gains tax treatment and, in many cases, entrepreneurs relief. T qualify as an EMI ptin, varius requirements must be satisfied as regards the shares under ptin, the cmpany in questin, the individual ptinhlder and the terms f the ptin. General requirements Purpse test: an EMI ptin must be granted fr cmmercial reasns in rder t recruit r retain an emplyee and nt as part f a tax avidance scheme r arrangement. Value test: an emplyee may hld unexercised EMI ptins ver shares up t 250,000 in value measured at the date f grant f the ptins. When valuing shares fr this purpse, any restrictins r risk f frfeiture are ignred. Once an individual has EMI ptins up t this maximum (whether r nt they have been exercised r released) three years must elapse befre he/she can be granted anther EMI ptin. Overall limit: there is an verall cap f 3 millin n the ttal value f shares as at the date f grant which may be placed under EMI ptins. There is, hwever, n limit n the number f emplyees wh may be awarded EMI ptins. Ntificatin requirement: the cmpany which emplys the ptinhlder must give ntice in an apprved frm t HM Revenue & Custms f the EMI ptin within 92 days f its grant. This ntice must cntain a declaratin by the cmpany and by the emplyee that the EMI requirements are met, including the wrking time requirement. Qualifying cmpanies A qualifying cmpany must satisfy the fllwing tests: It must be an independent cmpany nt under the cntrl f anther cmpany (r anther cmpany and persns cnnected with such ther cmpany) but may be quted r unquted. It must have fewer than 250 emplyees.

2 The cmpany s grss assets must nt exceed 30 millin at the date when the ptin is granted. Grss assets signifies all assets which shuld be shwn n the balance sheet withut any deductin fr liabilities. The cmpany must have a permanent establishment in the UK.. The cmpany must be carrying n r preparing t carry n a qualifying trade and (ignring incidental purpses) exist whlly fr the purpse f carrying n qualifying trade(s). Research and develpment (R&D) activity frm which it is intended t derive a qualifying trade is treated as carrying n a qualifying trade but preparing t carry n R&D activity is nt. A qualifying trade must nt cnsist whlly r substantially f excluded activities (and fr these purpses substantially is understd by HM Revenue & Custms t mean 20% r mre). Excluded activities include: dealing in land, cmmdities, shares, r financial instruments; dealing in gds therwise than by way f rdinary retail r whlesale distributin; banking, insurance, and ther financial activities; leasing r receiving ryalties r licence fees but see the R&D exceptin belw; varius prperty-backed trades including prperty develpment, farming, running htels r nursing hmes. Ryalties and licence fees attributable t the explitatin f a relevant intangible asset created by the trading cmpany (r anther cmpany in the grup when the intangible asset was created) are nt excluded activities. Fr this purpse relevant intangible asset means any asset treated as such in accrdance with nrmal accunting practice, and the definitin includes intellectual prperty created in circumstances where the right t explit it vests in the cmpany (alne r jintly with thers). The parent cmpany f a trading grup can be a qualifying cmpany prvided that all its subsidiaries are at least 51 per cent subsidiaries and the grup as a whle satisfies the trading activities requirement. T d s, at least ne cmpany in the grup must satisfy the trading activity cnditin fr single cmpanies and the grup s activities taken as a whle must nt include nn-trading r excluded activities t a substantial extent. Eligible emplyees T be an eligible emplyee, an individual must: be emplyed by the cmpany which grants the ptin r by a qualifying subsidiary f that cmpany; be required t wrk at least 25 hurs a week r, if less, 75 per cent f his/her wrking time (ie, time spent n remunerative wrk as an emplyee r self-emplyed persn); and nt have a material interest in the cmpany. Thus, the individual and/r the individual s assciates must nt wn r cntrl, directly r indirectly, ver 30 per cent f the cmpany s rdinary share capital r (fr clse cmpanies) be entitled t ver 30 per cent f the assets available t participatrs n a winding up. Optin terms A qualifying ptin must be: ver fully paid up, nn-redeemable rdinary shares; capable f exercise within ten years f grant; recrded in a written agreement setting ut all its terms; and nt capable f assignment t any ther persn.

3 Several matters (eg, exercise price, earliest date f exercise, restrictins n shares (if any), perfrmance criteria) are left pen t the parties t agree rather than being prescribed by legislatin. Tax privileges 1 Incme tax: n incme tax arises n a grant. If an EMI ptin is exercised within ten years f the grant, n incme tax arises n exercise unless the ptin has an exercise price less than the market value f the shares at grant. If s, the discunt will fall int tax n exercise. When an EMI ptin is granted it is necessary t agree with HM Revenue & Custms the value f the shares under ptin at the date f grant. This valuatin can be settled befre r after the ptin is granted and a user friendly valuatin frm is available t assist the prcess. The incme tax treatment can be affected if a disqualifying event ccurs (see belw). 2 PAYE/NICs: PAYE and NICs will be payable if an incme tax charge arises and at the relevant time the shares under ptin are readily cnvertible assets (ie, capable f realisatin in cash at that time r sn afterwards). 3 Capital gains tax: when the shares acquired n exercise f an EMI ptin are sld, capital gains tax will nrmally apply t tax any gain. The current rates f capital gains tax (unless entrepreneurs relief applies) are: Capital gains tax (6 April April 2014) Annual exemptin 10,900 Tax rate: Basic rate incme tax payers 18% Tax rate: Higher and additinal rate incme tax payers 28% Entrepreneurs relief, if available, reduces the capital gains tax rate t 10 per cent n the first 10 millin f qualifying capital gains made by an individual during his/her lifetime. This relief is nrmally available t emplyees r directrs n dispsals f shares in a trading cmpany (r the hlding cmpany f a trading grup) prvided that, thrughut a ne-year qualifying perid, the emplyee/directr wns at least 5 per cent f the rdinary share capital f the cmpany and can exercise at least 5 per cent f the vting rights in the cmpany. Hwever, under new rules intrduced by the Finance Act 2013 an emplyee wh acquires shares n the exercise f an EMI ptin and sells thse shares n r after 6 April 2013 will be eligible fr entrepreneurs relief n such sale prvided that the EMI ptin was granted at least a year befre the sale f the shares and certain ther cnditins are fulfilled (including ntably that since the grant f the EMI ptin he/she has remained an eligible emplyee and the cmpany has been a trading cmpany (r the hlding cmpany f a trading grup)). 4 Crpratin tax: cmpanies are generally eligible fr a crpratin tax deductin equal t the value f any shares issued t emplyees n exercise f EMI ptins less any exercise price paid. Disqualifying events The tax treatment is affected if a disqualifying event ccurs, such as: the cmpany cming under the cntrl f anther cmpany; the cmpany ceasing t carry n a qualifying trade; the ptinhlder ceasing t be an eligible emplyee;

any alteratin t the cmpany s share capital which either results in the EMI requirements ceasing t be met r increases the value f the shares under ptin where the increase in value is deliberate r the

t an EMI ptinhlder resulting in the emplyee hlding unexercised ptins ver shares with a ttal value exceeding 250,000; r any alteratin being made t the terms f the ptin which increases the market value

4 any alteratin t the cmpany s share capital which either results in the EMI requirements ceasing t be met r increases the value f the shares under ptin where the increase in value is deliberate r the alteratin is fr nn-cmmercial reasns; any cnversin f the shares t which the ptin relates int shares f a different class; an HM Revenue & Custms apprved cmpany share ptin plan (CSOP) ptin being granted t an EMI ptinhlder resulting in the emplyee hlding unexercised ptins ver shares with a ttal value exceeding 250,000; r any alteratin being made t the terms f the ptin which increases the market value f the shares, r results in the EMI requirements n lnger being met. If a disqualifying event ccurs befre the ptin is exercised and the ptin is nt exercised within 90 days f that event, incme tax will be payable n exercise n the difference between the market value f the shares n exercise and their market value immediately prir t the disqualifying event. In ther wrds, shelter frm incme tax is lst fr grwth in value after the date f the disqualifying event. Mills & Reeve cmment: EMI ptins ffer generus tax breaks t help attract and retain key emplyees vital t the future success f a business. There is substantial flexibility t enable cmpanies t establish tailr-made arrangements fr each key emplyee awarded an EMI ptin r t intrduce an EMI plan whse rules apply t all EMI ptinhlders. Specifically targeted at smaller entrepreneurial trading cmpanies, EMI ptins have becme a standard feature amng many smaller cmpanies, particularly in the hi-tech sectr. When EMI ptins are granted, cmpanies will need t cnsider placing restrictins n the resulting shares (eg, cmpulsry sale if the emplyee leaves r if there is a takever) and hw best t d s. This sectin f LaunchPAD has been prepared n the basis f the law n 10 January Cntact If yu wuld like t discuss yur business venture with a member f ur LaunchPAD team please cntact: Manchester Debrah Clark Head f Private Tax & Trusts T +44(0) E debrah.clark@mills-reeve.cm Cambridge Christpher Twnsend Partner T +44(0) E christpher.twnsend@mills-reeve.cm Cntact details fr each specialist member f the LaunchPAD team can be fund at the end f the respective chapters. LaunchPAD is als available nline at Mills & Reeve LLP is a limited liability partnership authrised and regulated by the Slicitrs Regulatin Authrity and registered in England and Wales with registered number OC Its registered ffice is at Funtain Huse, 130 Fenchurch Street, Lndn, EC3M 5DJ, which is the Lndn ffice f Mills & Reeve LLP. A list f members may be inspected at any f the LLP's ffices. The term "partner" is used t refer t a member f Mills & Reeve LLP. The cntents f this dcument are cpyright Mills & Reeve LLP. All rights reserved. This dcument cntains general advice and cmments nly and therefre specific legal advice shuld be taken befre reliance is placed upn it in any particular circumstances. Where hyperlinks are prvided t third party websites, Mills & Reeve LLP is nt respnsible fr the cntent f such sites.

briefing The Enterprise Investment Scheme Tax reliefs

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