Morr & Co Solicitors
Enterprise Management Incentive (EMI) Share Schemes
For companies that meet the qualifying criteria, EMI Share Schemes options are tax-advantaged and flexible employee share incentives.
One of the major benefits of the EMI option regime is that it permits smaller companies to compete with larger organisations when recruiting and retaining talent with minimal upfront cost or tax liabilities.
Overview of EMI Share Schemes
In short, EMI Share Schemes comprise a tax-efficient right for an employee to purchase shares (in the future) at today's valuation. Under the EMI Share Scheme rules, the additional tax-efficiencies are that the gain made by the employee on the shares will not be subject to usual employee taxes.
EMI options allow employees to participate in the growth of the business without them having to make any initial financial investment or become minority shareholders and with the added benefit of being taxed like an entrepreneur.
The EMI Share Scheme is available to companies that are trading and have less than 250 full time employees and gross assets of less than £30M. Further details of the requirements are set out below.
The key benefits of EMI Share Schemes
- Shareholders participate in the exit proceeds on a sale without the employer company having minority employee shareholders in the business.
- Companies can drive specific behaviours by adding financial performance requirements to the vesting criteria of the options (such as requiring that a percentage of the shares will cease to be available under the option if performance targets are not hit over successive time periods).
- There is also a great deal of flexibility in how options can lapse. In addition to not hitting KPIs (see above), this can result from an employee leaving the company (which can also vary depending on the circumstances of departure).
- In relation to the tax benefits, so long as the EMI options are granted with an exercise price equal to the market value of the shares (at the time of grant) the following applies:
- income tax and NICs will not be payable on the grant of the EMI option;
- income tax and NICS will not be payable on the exercise of the option and, instead, tax is due on the capital gain (i.e. the difference between the exercise price and the sale price);
- business asset disposal relief (BADR), which replaced entrepreneurs' relief, will potentially be available on the sale of the EMI shares. This reduces the rate of capital gains tax to 10% on the first £1m of lifetime gains. To qualify, the shares must be sold more than 24 months after the grant of the EMI option but they do not need to represent 5% or more of the share capital; and
- corporation tax relief may be available on the gain received by the employee.
If the EMI options are not granted with an exercise price equal to the market value of the shares (at the time of grant), the difference between the market value of the shares at the time of the grant (or, if lower, the current market value) and the exercise price will be chargeable to income tax and NICs.
The options can be granted over newly issued shares or shares held by an existing shareholder.
There are a number of requirements which companies must comply with in order to issue EMI share options. These include that the company must:
- carry on a "qualifying trade" or be preparing to do so and have a permanent establishment in the UK. If options are being granted to employees across a corporate group, these requirements must be satisfied by at least one company in the group;
- in addition to any other member of its group, have gross assets not exceeding £30 million;
- issue the EMI options over shares in a company that satisfies the "independence" condition, meaning that, if the company is part of a group, the EMI options must be over shares in the parent company; and
- not have more than 250 full-time equivalent employees.
The shares must be ordinary, non-redeemable and non-convertible and fully paid up, but it is permissible for the shares to be subject to restrictions.
In relation to what is deemed a qualifying trade, the rules provide that this must comprise of a trade that is carried out with the intention of making a profit other than one which wholly or to a substantial extent comprises of one of HMRC's "non-qualifying" activities. These include:
- dealing in land, commodities, futures or shares etc;
- banking, insurance and other financial activities;
- leasing and hiring;
- legal or accountancy services;
- property development;
- managing nursing or residential care homes; and
- acting as a “service company” in providing any such activities to an associated business.
In order for an employee to be eligible to receive an EMI option, he must:
- be a full-time employee who is committed to spending at least 25 hours per week, or, if less, 75% of his working time in the business of the group; and
- not have or be deemed to have, at the time of grant, a “material interest” (30% or more) in the company.
Grant limits and other requirements
A company must not, at any time, have shares available under EMI options that exceed a valuation of £3m (at the grant date).
There is also a limit on the value of shares (at the grant date) which any individual employee may hold under an EMI option. This is currently £250,000.
In relation to the option period, there is a requirement that employees must be able to exercise the EMI share options within 10 years. Furthermore, the option must be in writing and it must set out any restrictions on the shares.
Companies must establish the market value of the shares prior to granting the EMI options and this valuation should be formally agreed with HMRC.
After EMI options have been granted, it is vital that HMRC is notified (online) within 92 days of the grant date in order to qualify for the tax treatment.
HMRC will have a period of 12 months in order to make enquiries as to eligibility of the grant and otherwise the EMI option is deemed to qualify.
After 90 days following the occurrence of a disqualifying event, any further growth in the value of the share will cease to qualify for the EMI relief meaning that income tax and NICs will be payable on that element of the sale proceeds (which could create a PAYE and NICs liability for the company).
For this reason, EMI options plans often provide that options will lapse 90 days following a disqualifying event.
Disqualifying events include:
- the company ceasing to meet the independence requirement;
- the company ceasing to carry out a qualifying trading activity;
- the option holder ceasing to be a qualifying employee;
- the option holder not having met the “time commitment” requirement;
- certain alterations to the share capital;
- certain variations to the option agreement; and
- the option holder being granted options that exceed the individual limit of £250,000.
How can we help?
Our corporate and commercial team has significant experience in assisting businesses considering EMI share options and alternative share incentive schemes. We regularly advise on the choices available to meet individual circumstances and draft share option schemes or growth share plans to meet their requirements. We also have excellent relationships with tax advisors that complement our legal services.
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