Private Companies Should Make The Most Of Tax Efficient Employee Share Scheme, Says PWC

by Jason Gorringe, Tax-News.com, London

14 May 2008

There has been an upturn in interest from private companies across the UK seeking to set up tax efficient employee share option schemes, PriceWaterHouseCoopers revealed on Tuesday.

However, due to impending changes in this year’s Finance Act, PwC warned that time is running out for large private businesses to make use of this incentive.

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.

Currently, most trading companies with gross assets worth less than GBP30mn 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% usage in 2007 from 3% in 2006.

Kevin Nicholson, PwC's UK head of entrepreneurs and private companies, explained that:

“Over the past decade, the EMI scheme has become very popular with business owners 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%. 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.”

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 GBP100,000 to GBP120,000 from Budget day, 12th 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, PwC explained.

The firm went on to give the example that, in order to leave the management team with say GBP100,000 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 GBP122,000, to take account of the 18% 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 GBP169,000 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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