Small and medium sized manufacturing businesses may sometimes find themselves at risk of losing key employees to larger companies offering bigger pay packets.

However, a potential solution may be available for businesses who consider themselves vulnerable to this risk. There are certain share based incentive schemes which may help to redress this imbalance and give smaller employers a fighting chance of retaining key talent.

Tax-advantaged Enterprise Management Incentive (EMI) share option plans provide many smaller businesses with a useful weapon for incentivising and retaining key employees (by granting employees the right to acquire a direct interest in the business on the occurrence of one or more future events). There is a lot of flexibility in relation to the design of these arrangements and how they can be tailored to meet specific business objectives.

In addition to their commercial flexibility, EMI share option plans are also highly tax efficient. Each participating employee may be granted EMI options over shares with a market value of up to £250,000 (measured when the option to acquire the shares is granted) and any value delivered to the employee when the resulting shares are sold should be subject to Capital Gains Tax (rather than Income Tax and National Insurance Contributions).

EMI options can only be granted to full time employees (who dedicate 25 hours a week or, if less, 75% of their working time to the business). Companies considering whether to implement such a scheme must also meet certain requirements, including:

  • Being ‘independent’ (not being under the control of another company)
  • Having a qualifying trading activity (companies engaging in certain trades will not qualify to grant EMI options)
  • Having gross assets of less than £30 million
  • Having fewer than 250 full time equivalent employees

If a company qualifies then, due to the flexible nature of EMI, a structure can be tailor-made to suit the needs of the business and its shareholders. When it comes to designing how an EMI scheme could work for your business the following questions are good places to start:

  • Who should participate in the arrangement?
  • How and when employees can realise value from their interests (often on a sale or through dividends)
  • What time frame is being considered to allow employees to become shareholders?
  • What should happen if employees leave before their options become exercisable?