Incentivising employees through an EMI scheme
What is an EMI and why should it interest you?
EMI stands for Enterprise Management Incentive, a tax-advantaged share option scheme designed for smaller companies.
One of the biggest challenges facing start-ups and early-stage businesses is attracting, and retaining, quality talent. Highly skilled or experienced people often have high salary expectations, which isn’t particularly feasible for small businesses. Putting together a different remuneration package, which allows for equity participation in the business by the issue of options under an EMI scheme, could help overcome this issue.
How does it work?
Employees are granted options to purchase shares in the company for a pre-agreed price, which is usually low if the company is in an early stage of its life cycle. The main advantage of an EMI scheme is that it is very flexible; the trigger point for the employee to exercise their option and become a shareholder can be determined by the business owner. The most common trigger is the sale of the company, so the employee would only become a shareholder immediately prior to the sale. Alternatively, you can allow employees to acquire shares earlier, which would then allow the employee to participate in any dividends the company declares from time to time, and you can also specify whether the employee’s entitlement depends on them achieving certain targets (ie. you get this many shares if you grow the company by x% and this many shares if you grow the company by y%).
By enabling employees to have a shareholding in the company, they are incentivised to help grow the company.
Relief 1: Income Tax
The employee will benefit from:
- relief of income tax on the grant of an option;
- relief of income tax on the exercise of an option (providing the exercise price was at least equal to the market value of the shares at grant); and
- relief of national insurance contributions on the exercise of an option (providing if on exercise there was no income tax liability).
Relief 2: Corporation Tax
The issuing company may benefit from relief of corporation tax upon the exercise of an EMI option.
On disposal of the shares acquired as a result of having exercised an EMI option, the employee may face a capital gains tax liability. Capital gains tax is payable on any gain made over the market value of the shares at grant. However, if certain requirements are met, entrepreneurs’ relief may be made available to the employee on the disposal of the shares.
As you would expect, there are certain conditions that both the company issuing the options and the employee receiving the options must satisfy.
Independence: The issuing company must not be under the control of another company or a 51% subsidiary of another company.
Qualifying subsidiaries: If the issuing company is a parent company, its subsidiaries must be ‘qualifying’, meaning that the issuing company must own at least 51% of the subsidiaries’ shares.
Gross Assets Test: The value of the issuing company’s gross assets must not exceed £30,000,000 million.
Employees: The issuing company must have fewer than 250 full-time employees, or part-time equivalents.
Trading requirement: The issuing company must carry on a qualifying trade.
Permanent UK Establishment: The issuing company (or if it is a parent company, the qualifying subsidiary) must have a permanent establishment in the UK.
Financial limit: The issuing company cannot grant EMI options worth over £3,000,000 of its shares.
Working hours: to be an eligible employee you must either:
- work for the company for an average period of 25 hours per week;
- if this is less than 25 hours per week and the employee is under other employment, then employment at the issuing company must total at least 75% of the employee’s working time; or
- the employee is under no other employment.
Cannot have a material interest: Neither the employee nor an associate of the employee can have a material interest in the company. This means having beneficial ownership or control of more than 30% of the Company’s shares (or assets upon winding up).
Individual limit: An employee can hold unexercised EMI options over shares worth up to a maximum limit, currently £250,000.
Under the EMI scheme, the shares subject to options must be non-redeemable, fully paid up, ordinary shares.
EMI options can only be granted by way of a written agreement between the issuing company and the employee.
Any grant of share options to employees must be registered at HMRC via its online portal, ERS online. Failure to register the EMI scheme within 92 days of the grant date will result in the option losing its tax advantages.
Get in touch
For further information about EMI schemes, please do not hesitate to contact Kirsty Simmonds or call 0345 070 6000
The purpose of this note it to provide a brief overview as to what an EMI is, what tax reliefs are available and what the qualifying criteria for the company, employees and the shares are. It is not intended as legal advice. In the case of specific problems, we recommend that professional advice be sought.