The Enterprise Management Incentive (EMI) Share Options
Enterprise Management Incentive (EMI) share option schemes are excellent for attracting, motivating, and retaining key members of staff and are suitable for many small businesses. They are tax efficient and straightforward to administer.
Within the scheme share options are issued to staff on a completely discretionary basis. The employees then have the option to purchase shares in the company at a fixed price (usually the current value) at some point in the future (usually three to ten years from the date of the option). As your company grows the value of the shares increases, hence the options become valuable. Restrictions in the shares and option contracts mean that you always retain control of the company, the options or shares cannot be transferred and the employee will forfeit the options if they leave.
What are the benefits?
Rewarding key personnel under an EMI share option scheme helps to align the employees’ objectives with that of the company (increasing the value of the company). It also encourages staff loyalty within your organisation.
The grant of the option is tax-free and there will normally be no tax or National Insurance contributions for the employee to pay when the option is exercised. There will normally be no National Insurance contributions charge for the employer.
The growth once exercised will be taxed as a capital gain (0% to 28%) as opposed to as employment income (which could be up to 47%). As you can see this is much more tax efficient for your employee.
Do I Qualify for EMI?
There are conditions that must be met if a company wishes to operate the EMI option scheme for its employees. These include:
- Must be a trading company.
- Scheme must be established to attract or retain employees.
- Gross assets of the company do not exceed £30m.
- Value of the shares under the option scheme must not exceed £3m.
- The company must not be controlled by another company. However, employees of subsidiary companies may be granted options in the parent company.
- The company must have less than 250 full time employees.
- Must not be an excluded trade. These include dealing in land, property development, leasing, certain financial activities, farming, operating or managing hotels and providing legal or accountancy services.
This is not the complete list of conditions but what we believe to be most relevant to most small businesses. Employees are eligible for EMI options only if they are required to spend:
- At least 25 hours each week (the 25 hours requirement), or
- If less, 75 per cent of their working time (the 75 per cent requirement).
They also must not own more than 30% of the shares in the company or hold EMI options with a value greater than £250,000 when granted the option.
In summary, an EMI share option can be granted to an employee enabling them to share in future increases in the value of the company in a tax efficient way.
If you would like to discuss this further please contact Green Accountancy.
The basic outline of the work involved for an EMI scheme is:
- An initial discussion regarding suitability of scheme for company and its objectives.
- Notes and advice on EMI schemes, criteria and examples.
- Meeting to discuss the scheme and possible application of the scheme to your company.
- Providing written confirmation and explanation with reworked examples specific to the company.
- Solicitors will the need to provide the draft share option agreement.
- Decision on amounts of shares to be issued, timings on exercise, buy back of shares.
- Decision on whether the shares will be Class A Ordinary Non-Voting Shares.
- Decision on whether the shares issued under options are from directors (usually preferable) or to be issued by the company.
- Agreement of share buyback terms and conditions including share valuation method.
- Review and agreement of all other terms in draft share option / shareholders agreement.
- Solicitors will then need to redraft and review of share option agreement prior to issue to employee.
- Answering any queries arising from employees to be issued share options.
- Advance clearance of the company criteria for participation in EMI scheme.
- Review and planning regarding company purchase of own shares including amendments to memorandum and articles of association if necessary.
- The company will then need to provide background information to support the valuation proposal and send the form VAL 231 to HMRC.
- Issue of share options to employees, receiving signed agreements, storage of agreements.
- Notification to HM Revenue and Customs of the share options issued, including statutory forms (Form EMI1). This needs sent in within 90 days.
- Accounting for the liability under share option agreements.
- A company whose shares are the subject of an EMI option at any time during a tax year must fill in an EMI tax return, Form EMI 40, and send it to HMRC within three months of the end of the tax year.
- The company may also need to complete a valuation when the EMI option is exercised.
Please note the Green Accountancy cannot provide a share option agreement and the company will need to seek the assistance of a solicitor for this work.