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Large firms face share option deadline

Thursday, 15 May 2008

Time is running out for large private firms to use tax efficient employee share option schemes.

PricewaterhouseCoopers warns that when the Finance Act gains Royal Assent in July, the enterprise management incentive (EMI) scheme, which provides businesses with a tax efficient means of rewarding senior managers with share options, will no longer be open to companies with 250 employees or more.

Significant year-on-year increase

Currently, most trading companies with gross assets worth less than £30 million can set up an EMI scheme, regardless of how many people they employ.

EMI schemes are one of the more effective tax incentives available to UK business. Findings from a recent study conducted by PricewaterhouseCoopers suggested that EMI schemes are having a positive impact, with a significant year-on-year increase in the use of such schemes by the UK’s private business sector (12 per cent usage in 2007 from 3 per cent in 2006).

Kevin Nicholson, UK head of entrepreneurs and private companies at PricewaterhouseCoopers, said that the EMI scheme has become very popular with business owners over the past decade as a means of rewarding high-performing senior managers.

Under the scheme, employees receive share options, which when realised are taxable as a capital gain at 18 per cent. This compares very favourably to the rate of tax payable on an equivalent cash bonus.

“In a few months time employers will no longer be able to set up new EMI schemes if they have 250 employees or more, although existing schemes will be unaffected. This means that for some larger employers there is a window of opportunity to set up an EMI scheme to reward their employees for delivering business growth before it is too late," Nicholson explained.

Lower tax liability

As well as limiting access to the scheme to companies with less than 250 employees, the value of share options that can be granted per employee under the scheme has been increased from £100,000 to £120,000 from Budget day, 12 March 2008.

By setting up an EMI scheme now, while they still can, employers with more than 250 employees can allow managers to be incentivised to share in the growth in value of the company with a lower tax liability.

For example, in order to leave the management team with say £100,000 in their pockets following the capital growth in the company, the gross cost to a company using share options under an EMI scheme would be £122,000 to take account of the 18 per cent capital gains tax that employees would need to pay when they eventually sell their shareholding.

By way of comparison, if the company instead chooses to reward employees for their efforts in driving growth in value by paying cash bonuses, they would need to pay a gross amount of £169,000 to allow for the income tax that employees would have to pay on their reward. In both cases, corporation tax relief would be obtained by the company.

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