Orrick's tax team in London includes specialists in the design and implementation of a variety of employee share and share option arrangements.

We offer a full service to businesses wishing to either create an equity incentive plan or to build on existing arrangements, and we advise both purely UK based clients and also businesses with cross-border needs.

The UK is currently a relatively costly personal tax environment, and such incentive plans can not only carry significant commercial advantages in motivating key personnel, but can also offer very valuable tax savings.

Enterprise Management Incentives

The most popular UK share option scheme for emerging companies with UK–based employees is the tax favoured Enterprise Management Incentive (EMI) scheme. We have implemented many such plans for fast growing businesses, particularly in recent times for clients in the technology market.

Originally launched in 2000 by the then Chancellor, Gordon Brown, EMI option schemes combine flexibility in their design with high tax efficiency for smaller companies. These arrangements can give selected employees the right to acquire company shares at some point in the future, often subject to performance conditions, but at a price fixed at grant.

To be eligible to grant EMI options, companies must meet certain qualifying criteria. For example:

  • Independence (i.e. must not be a 51% or greater subsidiary of another company)
  • The company or its group must be engaged in a "qualifying trade" in the
  • Gross assets must not exceed £30 million as at the date of grant
  • There must be less than 250 full time equivalent employees
  • The shares under option must be ordinary shares

Individual option recipients must also meet certain eligibility criteria and are subject to per-person limits. For example:

  • Participants must work at least 25 hours per week, or failing this, 75% of their working time must be spent in the employment of the relevant company
  • Participants must not have a ‘material interest’ (together with any associates) of 30% or more in the company’s shares
  • There is a maximum individual entitlement of EMI options over £250,000 worth of shares at any time
  • There is also an overall group limit of £3 million in the total value of unexercised EMI options.

    EMI Advantages

    • Company has discretion as to whom to reward and to what extent
    • Potentially no income tax or National Insurance on grant or exercise of the option
    • Gains potentially treated as capital gains on sale, thereby more tax efficient than paying a cash bonus
    • Relative certainty on tax treatment—the tax breaks are government approved, and share values can be agreed in advance with HM Revenue & Customs
    • Company can determine exercise periods and prices
    • Performance conditions may be attached to awards
    • Options may lapse on termination of employment
    • Potential corporation tax relief when options are exercised

    Employee share schemes are not just about attracting and retaining good people. They can generate large tax savings, conserve cash and help drive your business forward.

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