Enterprise Management Incentives (EMI) option schemes offer a tax-efficient way to reward and retain key employees through company shares. Setting up an EMI scheme involves several important steps and considerations to ensure compliance with HMRC regulations.
What Is an EMI Scheme
An Enterprise Management Incentive (EMI) scheme is a tax-advantaged share option plan designed specifically for smaller, higher-risk companies. It allows you to grant share options to your employees up to £250,000 per employee over a three-year period.
EMI schemes provide significant tax benefits compared to other option schemes. When employees exercise their options, they typically don’t pay income tax or National Insurance on the difference between what they pay for the shares and their actual market value.
For your company, EMI schemes can be powerful tools for attracting talent when you can’t match the salaries offered by larger competitors. They create alignment between employee and shareholder interests, fostering a culture where staff are motivated by the company’s long-term success.
Eligibility Criteria for EMI
To qualify for an EMI scheme, your company or group must meet specific criteria to be considered a qualifying company. Your business must have gross assets not exceeding £30 million and fewer than 250 full-time employees. Additionally, your company must be independent and not controlled by another company.
Not all business types qualify. Your company must conduct qualifying trade activities, which excludes certain sectors like property development, financial activities, and legal services.
Individual employees must also meet eligibility requirements to be considered a qualifying employee. They must work at least 25 hours per week or 75% of their working time for your company. They cannot hold more than 30% of your company’s shares.
Before implementation, obtaining HMRC approval for your share valuation is essential. This valuation determines the price at which options will be granted and affects the tax position of both the company and employees.
Key Features of EMI Options
EMI options typically come with vesting conditions that determine when option holders can exercise their rights to buy shares. Common vesting structures include time-based vesting (often over 3-4 years) and performance-based vesting tied to company or individual targets.
You’ll need to establish an option pool, setting aside a percentage of your company’s shares specifically for the EMI scheme. Most companies allocate between 10-15% of their share capital for this purpose.
Exercise conditions must be clearly defined. These specify when employees can purchase their shares—perhaps after a certain time period, upon hitting performance targets, or during specific company events like a sale.
EMI schemes require proper documentation, including an EMI valuation, option agreements, and board resolutions. Once implemented, you must register your scheme with HMRC and report options granted by 6 July following the tax year in which the options were issued.
Structuring And Granting EMI Share Options
The process of setting up EMI share options requires careful planning and adherence to specific EMI scheme rules to grant EMI options. Proper structuring ensures your scheme complies with HMRC regulations while meeting your company’s objectives, including the date of grant.
Developing an EMI Share Option Plan
Your EMI option plan forms the foundation of your scheme, outlining the scheme rules governing how options work within your company. The plan should clearly specify:
- Option pool size: Typically 10-15% of total share capital
- Vesting schedule: Often 3-4 years with a 1-year cliff
- Exercise price: Usually based on the current market value
- Good and bad leaver provisions: What happens if employees leave
Your plan must maintain qualifying status under HMRC rules. This means ensuring options remain within the £250,000 individual limit and £3 million company-wide cap, and that no employee holds a material interest in the company. Consider working with legal advisors specialised in EMI schemes to draft comprehensive documentation that protects your company.
Grant of Options Process
When granting options to employees, you must follow a structured option grant process:
- Identify eligible employees who work at least 25 hours weekly or 75% of their working time
- Agree on option terms including number of shares and exercise price
- Prepare option agreements for each employee
- Hold board meeting to formally approve the grants
- Issue option certificates to recipients
You must notify HMRC by 6 July following the tax year in which the options were granted using the Employment Related Securities (ERS) online service. Late notifications may result in the loss of tax advantages, and you risk losing these benefits if not reported on time. Keep detailed records of all grants, including copies of signed agreements.
Securing Advance Assurance from HMRC
Before implementing your EMI scheme, it’s wise to obtain advance assurance from HMRC. This confirms your company qualifies to operate an EMI scheme.
To apply for advance assurance:
- Complete the advance assurance application form
- Provide your company’s latest accounts
- Include details of trading activities
- Outline your company structure
- Submit information about existing shareholders
The process typically takes 4-6 weeks. HMRC will assess whether your company meets the EMI qualifying conditions, including having gross assets under £30 million, fewer than 250 employees, and qualifying subsidiaries. Securing advance assurance reduces the risk of unexpected tax liabilities later on.
Determining Exercisable Events
Your EMI plan must clearly define when options become exercisable. Common exercisable events include:
- Time-based vesting: Options become available over a set period
- Performance triggers: Based on company or individual milestones
- Exit events: Company sale, merger, or IPO
- Change of control: When majority ownership changes hands
You should carefully balance employee motivation with company protection. Most schemes include both regular vesting periods and accelerated vesting upon exit events. Tax implications vary depending on when options are exercised, and certain disqualifying events can impact the tax advantages. For example, options exercised within 90 days of leaving employment may retain tax advantages under certain conditions.
Tax Implications of EMI Schemes
EMI schemes offer significant tax advantages, including corporation tax deduction, that make them attractive for both employers and employees.
These benefits include favourable income tax treatment, reduced capital gains tax rates when shares are eventually sold, and relief from employer’s national insurance contributions, along with other tax reliefs.
Income Tax Treatment
When you receive EMI options, you won’t pay any Income Tax or National Insurance contributions at the time they’re granted. This differs from other share schemes which might trigger immediate tax liabilities.
If you exercise your options (buy the shares), the EMI tax treatment typically means you won’t pay Income Tax or National Insurance if:
- You exercise within 10 years of being granted the options
- The exercise price is no lower than the market value of the shares when the options were granted
This tax-free exercise is one of the most valuable benefits of EMI schemes. Without this protection, you would normally pay Income Tax on the difference between what you pay for the shares and their market value at exercise.
If the exercise price is set below market value at grant, you may face some tax charges, but these are often minimal compared to non-EMI arrangements, depending on what the employee pays.
Capital Gains Tax Considerations
When you sell your EMI shares, Capital Gains Tax (CGT) applies to any profit made, making EMI schemes the most tax efficient option due to their generous tax advantages. However, EMI shares qualify for preferential tax treatment:
- Employees with fully vested EMI shares are typically eligible for Business Asset Disposal Relief
- This means you pay only 14% CGT rather than the standard 24% rate
- The taxable gain is calculated as: sale proceeds minus (exercise price + any amount charged to income tax at exercise)
For example, if you exercise options at £10,000 and later sell the shares for £50,000, your gain would be £40,000. With Business Asset Disposal Relief, you’d pay just £5,600 in tax (14%) instead of £9,600 (24%).
The holding period of your shares after exercise can also affect tax treatment, so timing your sale carefully is important.
Maximising Tax Advantages
To get the most from your EMI scheme and make it the most tax efficient way, consider these strategies:
- Exercise timing: Plan when you exercise options based on current share value and your personal tax position
- Holding period: Hold shares and options for sufficient time to qualify for Business Asset Disposal Relief
- Annual exemption: Use your annual CGT exemption (£3,000) when selling shares
- Tax year planning: Consider splitting share sales across tax years to utilise multiple annual exemptions
It’s also worth noting that if your company is sold, specific provisions in EMI legislation can protect your tax position during the transaction.
Many employees choose to exercise options upon leaving a company to maintain tax advantages, as EMI benefits may be lost if you leave without exercising.
We Can Help You Set Up An EMI Scheme
Setting up an EMI scheme involves several important steps that require careful planning and execution, and understanding how EMI scheme work is crucial, especially considering the potential risks if the company fails. At Plus Accounting, we specialise in guiding businesses through this process.
We can help determine if your company or parent company qualifies for an EMI scheme. Not all businesses are eligible, so this initial assessment is crucial before proceeding.
Our team can assist with designing your EMI option scheme to align with your business goals. Whether you want an exit-based scheme that vests when your company is sold or another structure, we’ll help create the right framework to reward employees.
Here’s how we support you:
- Establishing company eligibility, including for unlisted companies
- Designing your EMI scheme structure
- Completing company valuations for HMRC
- Registering your scheme with HMRC
- Creating necessary documentation
- Advising on shareholder agreements
We understand the importance of getting your EMI share option plan right. A well-structured scheme can help attract and retain talented staff while providing significant tax advantages.
Our experts will explain how EMI options work for both your company and potential option holders. We’ll ensure you understand the implications for existing shareholders before implementation.
After setup, we provide ongoing support to help you manage your EMI scheme effectively, including assistance with annual reporting requirements to HMRC.
Contact us today to discuss how we can help set up an EMI scheme tailored to your specific business needs.