Enterprise Management Incentive (EMI) schemes, also known as EMI option schemes, offer tax-efficient incentives designed for trading companies to attract and retain employees. These schemes help companies provide significant tax benefits compared to other share arrangements, particularly highlighting the absence of employer’s national insurance contributions as a key financial advantage.
The benefits of EMI include tax efficiencies, potential financial rewards, and the ability to attract and retain talent while promoting an ownership culture within the company.
After setting up an EMI scheme, you must register it with HMRC. This is the first step in ensuring compliance with tax regulations.
Key compliance requirements include:
- Notification of grants – You must notify HMRC online by 6 July following the end of the tax year in which the options were granted
- Annual returns – Your company must submit annual returns for all EMI options
- Record keeping – Maintain detailed records of all option grants and exercises
The annual return requirement is particularly important. You need to report all EMI activity that occurred during the tax year, even if no new options were granted.
Failing to meet these compliance obligations can result in the loss of tax advantages. This could affect both your company and the employees who hold options.
EMI schemes differ from other tax-advantaged share plans like SAYE (Save As You Earn). EMI is specifically designed for smaller companies, offering more flexibility in how you structure your employee incentives.
When designing your EMI scheme, consider building compliance checkpoints into your process. This helps ensure you don’t miss important deadlines and maintain the tax-efficient status of your scheme.
Compliance and HMRC Requirements
Staying compliant with HMRC regulations is essential for companies operating enterprise management incentive schemes, including Enterprise Management Incentive (EMI) schemes. Following EMI scheme rules and meeting the qualifying criteria is crucial to ensure the scheme remains tax-efficient and legally valid. These requirements ensure your scheme remains tax-efficient and legally valid.
Overview of Compliance Obligations
EMI schemes offer significant tax advantages, but they come with strict compliance obligations. You must ensure your company remains eligible throughout the scheme’s lifetime. Your business must be independent with gross assets not exceeding £30 million, and it must meet the criteria for qualifying companies regarding trading activities.
Employees receiving options must work at least 25 hours weekly or 75% of their working time for your company. They cannot hold more than 30% of your company’s shares. Additionally, understanding the EMI qualifying conditions is crucial, as these conditions affect the tax implications for employees from the grant through to the exercise and eventual sale of the options.
Businesses can achieve corporation tax relief when employees acquire qualifying shares upon exercising their EMI options, highlighting the financial advantages for both employees and employers.
The options must be granted for commercial reasons to recruit or retain employees, not as part of tax avoidance arrangements.
You must maintain proper documentation of all option grants, including details of the shares, restrictions, and exercise conditions. This helps demonstrate compliance during HMRC inspections.
Regular reviews of your EMI scheme are advisable to ensure continued eligibility as your company grows and changes.
HMRC Notification and Reporting
You must notify HMRC by 6 July following the tax year in which the options were granted. For EMI options granted, it is essential to follow the legal procedures and documentation requirements.
The date of grant is crucial for tax calculations, including liability for capital gains tax, and for meeting the requirement to report the grant to HMRC within the specified timeframe.
Notification is done through the Employment Related Securities (ERS) online service on the HMRC website. You’ll need to register for this service if you haven’t already.
The notification must include:
- Details of the option holder
- Number of shares under option
- Exercise price
- Market value of shares at grant
- Any restrictions on the shares
Failure to notify HMRC within the deadline means the options won’t qualify for EMI tax advantages. This can result in significant tax liabilities for both your company and employees.
Annual Returns and Documentation
An annual return must be submitted to HMRC by 6 July following the end of each tax year. This applies even if no new options were granted during that year.
The annual return must include:
- New option grants
- Options exercised
- Options that have lapsed
- Any adjustments to existing options
- Details of shares acquired through option exercise
- Details of granted EMI options, including eligibility and conditions surrounding their grant and exercise
Maintaining proper documentation can help employers benefit from a corporation tax deduction based on the difference between the market value of shares and their exercise price.
You must maintain comprehensive records of your EMI scheme, including:
- Option agreements signed by employees
- Evidence of share valuations agreed with HMRC
- Board minutes approving option grants
- Any scheme rules or plans
HMRC can request to view these documents at any time. You should retain records for at least six years from the relevant tax year end.
Consequences of Non-Compliance
Failing to meet HMRC requirements can have serious consequences. Your EMI scheme could lose its tax-advantaged status, resulting in unexpected tax and National Insurance liabilities. Disqualifying events, such as an employee leaving the company or failing to meet working time requirements, can lead to the loss of tax reliefs associated with EMI options.
If an option is exercised more than 90 days after a disqualifying event, the tax benefits are significantly reduced, making it crucial for companies to monitor their EMI arrangements closely.
Non-compliance issues include:
- Late or missed notifications
- Failure to submit annual returns
- Granting options that exceed individual or company limits
- Granting options to ineligible employees
Penalties can apply for late or incorrect returns. For annual returns, penalties start at £100 and increase depending on how late the submission is.
If HMRC discovers non-compliance during an inspection, they may require immediate tax payments. In serious cases, HMRC may investigate your wider tax affairs.
To mitigate risks, consider appointing a dedicated person to oversee compliance. Regular reviews by legal or tax advisers can also help ensure your EMI scheme remains compliant with current regulations.
Operational Considerations and Best Practice
Implementing an EMI option scheme requires careful attention to several operational elements. Proper setup and ongoing management of the EMI share scheme ensure your scheme stays compliant while delivering the intended benefits to both your company and employees.
Offering ownership to employees through EMI schemes can significantly enhance employee engagement and dedication to the company.
Setting the Exercise Price for EMI Options
The exercise price (or strike price) is the amount employees will pay to buy shares when exercising their options. Typically, you should set this at the actual market value to avoid tax complications. For EMI options, these are often granted over ordinary shares, which are the most common type of shares issued to employees.
HMRC offers a valuation service to help determine this figure accurately. If you set the price too low, the difference between market value and exercise price may be taxed as income. Too high, and it diminishes the incentive for employees.
Best practice is to conduct a formal valuation, then agree this with HMRC before issuing options over ordinary shares. This provides certainty for all parties and prevents unexpected tax liabilities.
Remember to review your company valuation regularly, especially before issuing new batches of options to different employees. This ensures that employees can benefit by selling their shares at the current market value, ideally higher than their purchase price, thus realising a profit.
Control and Working Time Requirements
EMI schemes have specific eligibility criteria regarding employee working time and company control. To qualify as a qualifying employee:
- Employees must work at least 25 hours weekly or 75% of their working time for your company
- Your business must not be under the control of another company
- Employees cannot have material interest (over 30% of shares) in your company
For unlisted companies, it is crucial to agree on a market value in advance to help in obtaining advance assurance from HMRC, thereby mitigating any uncertainty regarding a company’s qualification for EMI schemes.
Additionally, your company must have a permanent establishment in the UK to qualify for certain tax benefits associated with the EMI scheme.
Common pitfalls to avoid:
- Not tracking changes in employee working patterns
- Failing to update HMRC when control structures change
- Overlooking changes in employee shareholdings
Regular monitoring ensures continued eligibility. Schedule quarterly reviews of these requirements to maintain compliance and protect the tax-advantaged status of your scheme.
Responsible Administration and Record-Keeping
Proper administration is crucial for your EMI scheme’s success. You must notify HMRC within 92 days of granting options using the ERS Online Service.
While EMI plans are not pre-approved by HMRC, obtaining advance assurance can confirm that your company qualifies for the EMI scheme, ensuring compliance and maximising tax benefits. Proper documentation and compliance are essential, especially when dealing with EMI shares, which have specific eligibility criteria for both companies and employees.
Seeking professional advice is essential to ensure compliance with all requirements and to fully benefit from the tax advantages of the EMI scheme.
Essential documentation includes:
- Option agreements
- Board minutes approving option grants
- HMRC valuation correspondence
- Annual returns to HMRC by 6 July each year
Maintain a central register of all options granted, exercised, or lapsed. This improves efficiency and response times when employees have questions or when preparing annual returns.
Consider using specialised software or professional advisers to manage your scheme, particularly as it grows more complex. This investment typically pays for itself in reduced compliance risks and improved operational efficiency.
We Keep you Compliant
Our dedicated team monitors every aspect of your EMI scheme to ensure ongoing compliance with HMRC regulations. We handle the complex paperwork and deadlines so you can focus on growing your business.
EMI schemes are the most tax efficient option, offering significant tax benefits such as taxes being due only when the shares are awarded and lower Capital Gains Tax rates. Additionally, there are no employer’s national insurance contributions when shares are granted or exercised, providing a significant financial advantage for employers. Adhering to EMI tax treatment guidelines is crucial to maintain the tax advantages of the scheme, as non-compliance can lead to the loss of beneficial tax treatments.
Latest Legal Updates and Guidance
EMI regulations change regularly, and staying current is crucial. Our compliance experts track all HMRC updates and legislative changes that affect your EMI scheme.
HM Revenue and Customs (HMRC) play a critical role in setting and updating the regulations for EMI schemes.
Business asset disposal relief (BADR) offers a reduced capital gains tax rate on the sale of shares granted under EMI schemes, provided specific conditions are met, such as holding the shares for a minimum period before sale. Additionally, capital gains tax (CGT) is only incurred when the shares are sold, making it a key consideration for businesses and employees participating in these share schemes.
We provide timely alerts about critical deadlines, such as the notification period after granting options. Missing this deadline can invalidate your scheme’s tax advantages, with HMRC accepting very few reasonable excuses.
Our quarterly briefings highlight regulatory shifts that might affect your existing arrangements. We also assess how Budget announcements could impact EMI valuation methodologies or eligibility criteria.
When changes occur, we explain them in plain English without the legal jargon. Your dedicated account manager will contact you directly about any urgent compliance matters that need immediate attention.
Our step-by-step implementation guide walks you through each compliance stage. The automated notification system alerts you when you’re approaching scheme limits, helping prevent costly errors.
We conduct annual compliance reviews to identify potential issues before they become problems. This proactive approach saves you time and protects your scheme’s tax-advantaged status.
Get in touch with us to stay compliant with EMI schemes.