Enterprise Management Incentives (EMIs) are share options which offer tax favourable incentives. They are intended to help small companies to recruit and retain key employees with the necessary skills to help the company grow and achieve its potential.
Grant of options
A “qualifying company” may grant EMI share options with a market value of up to £250,000 to a “qualifying employee”, subject to a total maximum value of options of £3 million in respect of the relevant company’s shares.
The option must confer a right to acquire shares that form part of the ordinary share capital of the company, are fully paid up and are not redeemable. The option must be capable of being exercised within ten years of the date of grant.
The option must be in the form of a written agreement between the person granting the option and the employee.
Tax treatment of EMIs
- No income tax or National Insurance Contributions (NICs) payable by the employee or the employer on the grant of the option.
- Normally no income tax or NICs due when an employee exercises the option, provided the employee buys the shares at a price at least equal to the market value of the shares on the date of grant.
- Capital gains tax is payable by the employee on the sale of the shares (entrepreneurs’ relief may be available) at a rate of as little as 10% rather than a maximum income tax rate of 45% for unapproved option schemes.
- The employer company may be able to claim corporation tax relief on the option gain when the employee exercises the option.
- If the option is exercised more than 90 days after a “disqualifying event”, income tax may be due on the increase in the value of the shares between the date of the disqualifying event and the date of exercise.
The following are disqualifying events:
- The company ceasing to carry on a qualifying trade;
- The company becomes a subsidiary of another company;
- The employee ceasing to be a qualifying employee;
- Changes to the terms of the option;
- Alteration to the share capital of the company.
In order for share options to qualify for EMI, companies must satisfy the following requirements:
- The company (or group) must have gross assets of no more than £30 million;
- The company (or group) must have fewer than 250 full-time equivalent employees (including directors) at the time of grant;
- The company whose shares are the subject of the options must not be the subsidiary of another company (i.e. in the case of a group, the options must be over the parent company);
- The company (or group) must carry on a “qualifying trade”;
- The company (or parent company) is resident in or has a permanent establishment in the UK.
A “qualifying trade” is one that:
- is conducted on a commercial basis with the intention of realising a profit; and
- does not consist (wholly or substantially) of the carrying on of one of HMRC’s excluded activities.
Excluded activities include:
- dealing in land
- banking, insurance or financial services
- professional services
- property development
- receiving royalties or licence fees (unless substantially deriving from Intellectual Property created by the company or group)
- operating or managing hotels or nursing homes
Before granting options, companies can apply to HMRC for an opinion as to whether the company or group meets the EMI requirements.
To be eligible for EMI options the individual must be an employee of the company, or in the case of a group, an employee of the parent company or any qualifying subsidiary. Employees include directors.
Employees are only eligible for EMI options if they are required to spend at least 25 hours a week or, if less, 75% of their working time, working as an employee of the company or group.
An employee is not eligible if they have a material interest in the company, or the parent company of the group. A material ownership is generally beneficial ownership of, or the ability to control directly or indirectly, more than 30% of the ordinary share capital of the company.
Registration and Notification Procedure
It is necessary for the company to obtain a market value of the shares at the date of grant. If an unquoted company wishes, it can agree the market value of its shares with HMRC Shares and Assets Valuation unit by completing Form VAL231. It will be necessary for the company to propose a valuation for the shares and provide necessary background information to support the proposed valuation.
Companies must register their EMI scheme with HMRC online.
Notification of EMI options granted must be made online to HMRC within 92 days of the date of the grant of the options. Up to 30 employees can be listed on each online form and an additional form may be used for grants to more than 30 option holders.
HMRC enforces the 92 day time period strictly and failure to notify within this time limit means that the options would be unapproved and the favourable tax benefits lost.
The form includes a declaration by a director or company secretary of the employer company that all necessary requirements are met and information provided is correct.
Companies must obtain a written declaration from each employee that they satisfy the working time commitment. The declarations themselves do not need to be submitted to HMRC but must be available for inspection if requested.
HMRC has 12 months to make enquiries as to eligibility beginning with the end of the 92 day period.
In addition, the company must complete an annual reporting form for each registered EMI scheme. The return must be filed by 6 July following the end of the tax year to which it relates. A nil return must still be made for a tax year even if no EMI options were granted or exercised in that year. The annual return must also be filed electronically.
Verfides has experience in valuing the shares of unquoted companies and advising on EMI schemes. We can also assist with the drafting of all documentation.
EMIs are a tax favourable share incentive arrangement for companies and their employees who meet the qualifying conditions. They are also a good way of rewarding key employees who the company wish to retain.