Enterprise Management Incentives (EMI) are tax-advantaged share options that qualifying UK companies can offer to eligible employees through EMI option schemes, with EMI options granted providing a powerful incentive for staff retention and alignment with company goals. These schemes allow employees to purchase company shares at a fixed price, providing a powerful incentive for staff retention and alignment with company goals.
Qualifying Company Criteria
To grant EMI options, your company or group must meet specific requirements set by HMRC for qualifying companies. Your business must have gross assets worth £30 million or less and fewer than 250 full-time employees. The company must also have a permanent establishment in the UK.
Additionally, any qualifying subsidiaries must be included in the total calculation of full-time equivalent employees to meet the regulatory standards.
EMI schemes are designed for independent trading companies. Your business must not be controlled by another company, and certain activities like banking, farming, property development, leasing, insurance, and professional services are excluded activities.
The shares offered under the EMI must be ordinary shares that are fully paid up and not redeemable. Companies must also have sufficient unissued shares available to satisfy the options when employees choose to exercise them.
Eligibility of Employees and Working Time Requirements
Not all employees can receive EMI options; only those who meet the criteria of a qualifying employee. To qualify, staff members must work for the company for at least 25 hours per week or, if less, at least 75% of their total working time. This requirement ensures that options go to those meaningfully contributing to the company’s success.
An option holder must meet these criteria to ensure they are significantly contributing to the company’s success. A disqualifying event occurs when an employee leaves the company, affecting their EMI options.
Employees with a ‘material interest’ in the company are excluded from EMI participation. This means anyone who already holds more than 30% of the ordinary share capital cannot receive EMI options.
EMI options can only be granted to genuine employees. Directors can qualify if they have an employment contract, but non-executive directors, consultants and contractors typically cannot participate in the scheme.
The total value of unexercised EMI options that can be held by any one employee is capped at £250,000 at the time of grant.
The Process of Granting EMI Options
The successful implementation of an EMI option scheme follows a structured process that ensures compliance with HMRC requirements and maximises tax benefits. The option grant date, also known as the date of grant, is crucial as it marks the point from which various regulatory and tax considerations apply. Proper establishment, valuation and documentation are essential elements of this process. After granting options, an EMI notification must be submitted to HMRC within the specified timeframe to ensure compliance. It is important to report option grants to HMRC to maintain the tax advantages associated with the scheme.
Steps for Establishing an EMI Option Plan
Before granting EMI options, you must ensure your company qualifies for the scheme. Your business must be independent and not controlled by another company. The company must also engage in qualifying trade activities. To set up an EMI share scheme, you must follow a structured process to ensure compliance and maximise benefits.
Properly managing option grants is essential to maintain compliance with regulations and maximise tax advantages. Managing an enterprise management incentive scheme is crucial for compliance and maximising benefits.
Start by seeking advance assurance from HMRC. This optional step provides confirmation that your company meets EMI requirements before you proceed. Clearly defining EMI scheme rules is essential for structuring a compliant and effective share plan.
Once qualified, you need to register your EMI scheme with HMRC. You’ll receive a reference number within 7 days, which you’ll use for future communications.
Remember, EMI options in a group structure must be granted over shares in the parent company, with at least one trading subsidiary carrying on a qualifying trade.
Setting the Exercise Price and Market Value
The exercise price for an EMI share is the amount your employees will pay to buy shares when they exercise their options. You can set this at or above market value, or below market value (though tax implications differ).
The shares must be qualifying shares to ensure they meet the necessary criteria for tax relief and alignment with company success.
Determining the market value of your shares is crucial. The actual market value of the shares at the time of exercise is crucial for determining tax implications. You can either:
- Apply to HMRC for a formal valuation agreement
- Conduct an independent valuation with help from professionals
A formal HMRC valuation provides certainty for tax purposes and is highly recommended. This valuation typically remains valid for 90 days.
For unlisted companies, valuation methods often include earnings multiples, net asset value, or discounted cash flow analysis.
Drafting Arrangements and Managing Shareholder Consent
Your EMI option arrangements must be documented thoroughly. This includes:
- Option agreements for each participant
- EMI plan rules governing how options operate
- Vesting schedules and performance conditions
Each agreement should clearly state exercise conditions, vesting periods, and what happens when employees leave.
It is also important to consider disqualifying events that could affect the beneficial tax treatment of EMI options.
Shareholder consent is typically required before implementing an EMI scheme. Existing shareholders need to approve the potential dilution of their shareholding.
After granting options, you must notify HMRC electronically by 6 July following the tax year in which the options are granted. This deadline is crucial for securing tax benefits.
Failing to meet notification deadlines could result in the loss of favourable tax treatment for your EMI options.
Timely EMI notification to HMRC is essential to secure the tax benefits associated with the scheme.
EMI Tax Advantages and Implications
Enterprise Management Incentive (EMI) schemes offer significant tax benefits for both employees and companies, making them an attractive option for equity compensation in eligible businesses. These advantages span income tax, National Insurance, and capital gains considerations. EMI schemes are considered the most tax efficient option for share-based compensation. Additionally, corporation tax deductions can be claimed on the costs associated with establishing and managing an EMI share scheme.
The EMI tax treatment provides significant advantages for both employees and employers, making it an attractive option for equity compensation. One of the notable benefits for employers is the absence of employer’s national insurance contributions (NIC) on the granted share options. This, along with other tax efficiencies, provides substantial financial advantages for businesses utilising EMI schemes, enhancing their overall corporate tax position and relieving them from additional tax burdens at the point of granting share options.
EMI schemes are designed to provide favourable tax treatment, which can result in substantial savings. EMI tax relief provides significant advantages for both employees and employers.
This creates a win-win situation for both parties, with the company benefiting from corporation tax relief on the option gains.
Overview of EMI Tax Advantages
EMI options provide exceptional tax efficiency and generous tax benefits compared to other share schemes. When options are granted, no income tax or National Insurance contributions (NICs) are payable—regardless of the value granted, and there are no employer’s national insurance contributions on the granted options, making it even more tax-efficient. This creates an immediate advantage over non-tax-advantaged schemes.
When you exercise your EMI options, you typically won’t pay income tax or NICs if the exercise price was set at or above market value at grant. This is a substantial benefit that allows you to acquire shares without immediate tax burdens.
For the company, there’s a corporation tax benefit too. Your employer can claim a corporation tax deduction equal to the total gain made by employees when they exercise their options. This creates a win-win situation for both parties. These generous tax advantages make EMI schemes highly attractive for both employers and employees.
Capital Gains Tax and Chargeable Gain
The primary tax advantage of EMI schemes appears when you sell your shares. Any gain is subject to Capital Gains Tax (CGT) rather than income tax, which typically means a lower tax rate.
However, choosing shares may result in a tax charge if acquired below market value or if gifted.
The EMI benefits extend to the favourable tax treatment of capital gains, making it a highly attractive option for share-based compensation.
This makes EMI schemes the most tax efficient way to handle share-based compensation.
Even better, EMI shares often qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). This means you pay only 14% CGT on gains, rather than the standard 24% rate for higher-rate taxpayers.
To calculate your chargeable gain:
- Take the sale proceeds
- Deduct the amount you paid to exercise the options
- Deduct any allowable costs
You can also use your annual CGT allowance to reduce taxable gains further.
PAYE, National Insurance Contributions (NIC), and Income Tax
EMI options streamline PAYE and NIC obligations for both you and your employer. At grant, there’s no PAYE or NIC liability to process, simplifying administration. This results in lower tax costs for both the employer and the employee.
The difference between the price an employee pays for the shares and their market value at the time of option exercise influences potential tax relief and financial benefits for the company.
If you exercise when the current market value exceeds the exercise price, this difference would normally create an income tax liability. However, with properly structured EMI options, this “option gain” is usually free from income tax and NICs.
There are a few situations where income tax might apply:
- If the exercise price was set below market value at grant
- If the options are exercised more than 90 days after leaving employment
- If the company no longer meets EMI qualifying criteria
Your employer must report all EMI activity to HMRC through annual returns, ensuring compliance with tax regulations.
Meeting specific notification requirements to HMRC is crucial to secure the tax reliefs associated with EMI options.
We Can Provide Clarity on EMI Options
At Plus Accounting, we understand that EMI options can sometimes seem complex. We’re here to help you navigate the process with confidence.
EMI options offer businesses a tax-efficient way to reward employees through share options. The UK government approval of the EMI scheme further legitimises it as an effective method for rewarding and retaining employees.
Obtaining professional advice is crucial to ensure compliance and maximise the benefits of your EMI scheme.
EMI options offer valuable tax benefits for employees who meet specific criteria. These include working at least 25 hours weekly (or 75% of their working time) for the company.
Key points we can clarify for you:
- Eligibility requirements for your company and employees
- How to set the right share price for your options
- Valuation agreements with HMRC before granting options
- Timing considerations to ensure qualifying status
- Proper documentation and notification procedures
It’s important to understand that EMI options cannot be granted when arrangements for a sale are already in place. We can help you navigate this timing issue.
For employees with a ‘material interest’ exceeding 30% of share capital before options are granted, EMI schemes aren’t available. We’ll explain alternative approaches.
Even if your business has corporate investors, you may still qualify for an EMI scheme. We’ll assess your specific situation against the eligibility criteria.
Our team provides straightforward guidance on EMI options, helping you avoid common pitfalls. We’ll ensure your scheme is properly structured from the start.
Contact us today for clear, practical advice on implementing an EMI option scheme that works for your business.