Finance Act 1999 Schedule 13

Finance Act 1999 Schedule 13: Enterprise Management Incentives (EMI)

Schedule 13 of the Finance Act 1999 introduced Enterprise Management Incentives (EMI), a UK government-backed share option scheme designed to help smaller, higher-risk companies attract and retain talented employees. The EMI scheme is considered one of the most generous and tax-efficient share option schemes available in the UK, offering significant advantages to both employers and employees.

The primary purpose of Schedule 13, and thus the EMI scheme, is to incentivize employees by giving them a stake in the company’s success. By granting options to acquire shares at a pre-determined price, employees are motivated to contribute to the company’s growth and profitability, as they directly benefit from an increase in the share value. This aligns employee interests with those of the shareholders, fostering a stronger sense of commitment and reducing employee turnover.

Several key criteria govern eligibility for both the company and the employees participating in the EMI scheme. Firstly, the company must be independent and have gross assets not exceeding £30 million at the time the option is granted. It must also have fewer than 250 full-time equivalent employees. The company’s main activity cannot be excluded, and typically this includes activities like dealing in land, banking, insurance, and property development.

Employees must work at least 25 hours per week or, if less, at least 75% of their working time for the company. They also cannot hold a material interest (over 30%) in the company before the option is granted. Furthermore, an individual employee can only hold options worth up to £250,000 at the time the option is granted (based on the unrestricted market value of the shares). This limit helps ensure the scheme benefits a wider range of employees rather than being concentrated among a few senior executives.

The tax advantages associated with EMI are significant. If the option is granted at market value, there’s no income tax or National Insurance Contributions (NICs) payable when the option is granted or when it’s exercised. Any gains made when the shares are eventually sold are subject to Capital Gains Tax (CGT), which may benefit from Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), potentially reducing the CGT rate to 10% if the qualifying conditions are met.

For the company, granting EMI options can be a valuable tool for attracting and retaining talent, especially for startups and high-growth businesses that may not be able to offer high salaries. While the company doesn’t receive an immediate tax deduction, they can deduct the market value of the shares (less the amount paid by the employee) for corporation tax purposes when the options are exercised, effectively creating a tax deduction.

In conclusion, Schedule 13 of the Finance Act 1999, through the introduction of the EMI scheme, has played a crucial role in supporting the growth of smaller businesses in the UK by enabling them to offer tax-efficient share options to employees, fostering employee engagement and aligning their interests with the long-term success of the company. The scheme’s regulations and eligibility requirements are carefully designed to ensure that it benefits both the employer and the employee, contributing to a more dynamic and competitive business environment.