Case Study

EMI and EIS for a digital media business

Gannons provided a tailored approach to share distribution, involving an Equity Incentive Scheme (EIS) to incentivise employees of a digital media business.

Our client, who operated in the digital media sector, wished to grow his business and incentivise his employees. Our client considered these essential steps to creating a high value business. However, the EIS also had to impress future investors.

Reason for options

The company did not pay dividends. It re-invested all profits. Consequently, prior to exit, there was no particular reason for employees to own shares. It would be more advantageous if the employees owned options.

EMI scheme

We discussed tax-efficient equity incentives schemes with our client and settled on the Enterprise Management Incentive (EMI) scheme. Together we prepared a tax market valuation for the EMI options. We explained that HMRC does not require an agreed tax market valuation when the company grants the options. However, the agreed valuation avoids potential difficulties. For example, it is trickier to agree a low option valuation when selling a high value business.

We prepared a business review and proposition and framed it so HMRC would accept it without prolonged negotiation. HMRC did not challenge our valuation.

Employee incentives

Once we agreed the tax market value, we issued EMI options that represented 20% of the company’s equity to key employees. These employees gained the option to acquire the shares when the company was acquired. Thus, these employees would gain any growth in the company’s shares valuation thereby incentivising them to work to grow the company.

Entrepreneurs Relief

The employees will also benefit from Entrepreneurs’ Relief. When they employees sell their shares, they will pay 10% capital gains tax on the increased value.

Investment using EIS

After the company issued the EMI options, it sought additional investment. The Seed Enterprise Investment Scheme was inappropriate, as the company had traded for over two years. However, the company qualified for the Enterprise Investment Scheme.

Criteria to qualify for EIS

The company needed to be a UK based company, with net assets under £15, and with fewer than 250 employees. Additionally, the company had to be owned by just one individual, and its trade (Software development in this case) was not a disqualified trade.

Additional benefits from EIS

The EIS was particularly appropriate because our client focused on capital growth. EIS investors gain income tax relief on subscription for the shares, and capital gains tax free growth.

Process of applying for EIS

Together we prepared an EIS advance assurance application for HMRC. Usually, HMRC takes five to six weeks to agree an EIS advance assurance. During this period, we had time to work on a number of aspects of this case for our client. This included preparing the investment agreement, including acceptable investor protections and investor’s rights.

We also ensured our client complied with the Financial Services and Markets Act (Financial Promotion) Order (FSMA). This ensured that our client did not send improper communications.

Finally, we reviewed and protected our client’s IP portfolio.

HMRC provided EIS Advance Assurance.

The outcome

Within a few months, the client had achieved his goal of incentivising his employees and raising significant investment in his business. On the eventual sale of his business his EIS investors will pay no capital gains tax and the client and his employees will pay 10% capital gains tax.

Catherine Ramsay is a member of the employee share plan team. There are many surveys and statistics which show that companies with employee share plans in place outperform those without. We implement a wide range of solutions for a wide range of business needs.

Catherine Ramsay

Manages to explain difficult concepts in easy to understand language. In tune with her clients.

Let us take it from here

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