Thinking of implementing an EMI scheme?

An Enterprise Management Incentive or “EMI” scheme is a UK government approved employee share option scheme, widely used by SMEs to incentivise, and reward key employees. Furthermore, because HMRC pre-approves the underlying share valuations, valuation risk is mitigated. 

EMI schemes offer tax benefits for both the employer and the employee. The gain in value on sale of their shares will be subject to Capital Gains Tax (CGT), with the potential to qualify for Business Asset Disposal Relief and charged a tax rate of 10% on the first £1m of gain (and 20% thereafter), rather than unfavourable income tax (40%+ for higher rate taxpayers) and national insurance rates as would be the case with staff bonuses and gains on other, non-tax advantaged share schemes.

Benefits to the employer include employee retention and engagement as well as employer national insurance contributions savings, by granting options instead of cash bonuses or other forms of compensation, and corporation tax deductions for the costs associated with establishing the scheme, including the granting of options to employees.

With EMI schemes, there is no upfront cost to the employee when purchasing the share options as the cost of the shares will be deducted from the proceeds on sale of the shares: the gain is what they will receive less any CGT payable.

Eligibility criteria

There are a number of criteria that apply to both the company awarding the options, and the recipients of the awards.

For the company itself: 

• It must be an independent trading company with gross assets not exceeding £30m.
• Certain activities such as property development, banking, farming, the provision of legal services and ship building are excluded from eligibility.
• The company must have fewer than 250 full time equivalent employees.
• In a group, EMI options must be granted over shares in the parent company.

For the recipients: 

• The individual(s) must be a full-time employee who works at least 25 hours per week, or, if less, at least 75% of their working time must be for the company.
• The individual(s) must not own more than 30% of the company’s shares before the options are granted.

Specialist tax advice should be sought in determining whether the eligibility criteria have been complied with (Buzzacott’s Corporate Tax team can assist in this area).

Option terms

The terms of the share options, including the price at which the options may be exercised (the ‘exercise price’) and the ‘vesting’ period are determined by the company. The exercise price can be set by the company at a level in line with or above the assessed ‘market value’ without incurring an upfront income tax charge (which would arise if these were able to be exercised below current market value at the date of issue). Typically, there’s a minimum 3-year vesting period before options can be exercised.

Valuation requirements

Another advantage of the EMI scheme is the ability to obtain prior approval of the share valuation, which has been phased out for other share incentive schemes. Whilst HMRC will always caveat their agreement to an EMI valuation by noting their approval is provided “without prejudice” and “without detailed examination”, this nonetheless provides some degree of comfort that awards made under this scheme will be less vulnerable to later challenge either from HMRC themselves, or from a future acquirer of the business in a due diligence exercise. 

In fact, the company must obtain a formal valuation of its shares to set the exercise price of the options. This valuation must be submitted to HMRC for approval, and once approved, the company typically has 90 days to issue the EMI options.