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“Do EMI schemes really work?”

"I’ve heard that businesses are using options (and in particular EMI schemes) against the downturn. How do they work?"

First of all, don’t be misled by government statistics. The Employee Share Ownership (ESOP) Centre has issued a press release which says that in 2007-2008 businesses granted a record £304 million worth of options to employees through the EMI scheme. The release implies that these options are now showing their value and that the effects have been compounded by the downturn.

The reality is that these options were taken out in the 12 months to the end of March 2008 (i.e. before we really went into recession, and more than six months before it was officially accepted and recognised) so there is absolutely no correlation at all with the recession!

However, EMI schemes are a great way of motivating and retaining key employees in a business. We have helped dozens of our entrepreneurial clients implement these schemes over the last few years.

So, what are Enterprise Management Incentives (EMIs)?

EMIs are tax-efficient share options. They are designed to help companies recruit and retain employees who have the skills to help them grow and succeed.

They are also a way of rewarding and incentivising employees, by giving them the chance to ultimately share in the ownership of a company in return for investing their time and skills and, most importantly, achieving certain targets. This is why they are particularly well suited to entrepreneurial businesses and we have helped a number of our clients to establish tough, but achievable, targets for their employees.

How do EMIs work?

Tax efficient share options with a market value of up to £120,000 may be granted to employees and companies that meet certain conditions, subject to a total share value of £3m under EMI options to all employees.

The grant of the option is tax-free and there will normally be no tax or National Insurance contributions (NICs) for the employee to pay when the option is exercised. There will normally be no NICs charge for the employer either. These tax benefits are not available to share options that are not registered under the EMI scheme.

Can anyone use EMI?

A business will not qualify if a substantial part of what it does is made up of excluded trading activities. These include:• dealing in land, commodities or futures, or shares, securities or other financial instruments;• leasing (including letting ships on charter, or other assets on hire) or receiving royalties or other licence fees;• providing legal or accountancy services;• property development ; and• operating or managing hotels or comparable establishments, such as a guest house or hostel, or managing property used as a hotel or comparable establishment.

An accountant with experience of implementing several EMI schemes will obviously be able to advise you as to whether or not your business, and your key employees, meet the necessary criteria for EMI, what sort of targets are appropriate for you to set them, and how best to implement the scheme. They can also help you to explain the various tax advantages to your employees.

Related articles"What should I do about the monstrous tax hikes in the new Budget?""How will the record-low base rate affect my business?” "How do I maximise the cash flow of my business?”

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