EMI share options – a tax-efficient reward

An Enterprise Management Incentive (EMI) scheme is an increasingly popular method of recognising and rewarding talented individuals.

Just like us, your great people help you to achieve great results, so retaining them in your workforce is essential.

However, many businesses are looking for another way of remunerating team members that does not harm cash flow or significantly increase the tax bill of the company or the individual. This is where EMI schemes can be effective.

What is an EMI scheme?

EMI is a government-approved, tax-advantageous share option scheme that is predominantly used by small to mid-sized UK businesses looking to share the financial success of the company with its team.

Share option schemes offer a lot of flexibility to reward team members, which can help to drive productivity and retain key workers within a business.

To put it simply, EMI option schemes allow businesses to:

Attract and retain the best employees.

Provide employees with a sense of ownership of the business.

Benefit from a more productive, incentivised and committed workforce.

Increase remuneration in a tax-efficient manner.

What are the tax advantages of an EMI scheme?

When a company establishes a scheme, it selects employees and gives them the option of acquiring shares over a prescribed period, subject to qualifying conditions being met.

This brings with it the following tax benefits:

There is no Income Tax or National Insurance charge on the exercise of an EMI option for an individual as long as it was initially granted at market value.
Where the shares increase in value between the time of grant and when the options are exercised, the uplift is not charged to Income Tax or National Insurance.
There will be a Capital Gains Tax (CGT) charge when the employee disposes of their shares if the sale price exceeds the value per share at the time of granting the options – CGT is at a lower rate than Income Tax.

However, these tax advantages can be lost if the company:

Fails to establish its EMI scheme within the terms of the legislation;
Does not notify HM Revenue & Customs (HMRC) within 92 days of the grant of an EMI option, or
A disqualifying event occurs, and option holders fail to exercise their share options within 90 days.

It is important, therefore, that directors seek advice beforehand to ensure that the scheme that they establish qualifies and that the exercising of shares is conducted properly.

Do all businesses qualify for an EMI scheme?

A business can utilise an EMI scheme if it meets various conditions, including the following:

249 or fewer employees.
Gross Assets of less than £30 million.
Not majority-owned or controlled by another company.
Not in an excluded industry (banking, farming, property development, provision of legal services, shipbuilding, or leasing).
There is also a £3m limit for the value of share options held by all employees.

Employees must also meet certain eligibility criteria to obtain shares, which include:

Work at least 25 hours per week or 75 per cent of total working time as an employee of the company.
Must not hold more than 30 per cent of the company’s shares.
Cannot hold share options worth more than £250,000 at the time of grant.

If you are unsure of your business’s eligibility or whether certain employees can be given shares, it may be best to check beforehand with a trusted professional adviser, as failing to establish eligibility could lead to the scheme being disqualified.

Confirm eligibility

Make sure that the business and employees qualify for EMI share options

Obtain valuation

A business should propose a valuation to use in the scheme and agree it with HMRC

Create a share pool

Establish the employee share pool and obtain approval from directors/shareholders

Grant options

Options can now be granted to employees

HMRC registration

Within 92 days of establishing the pool register your EMI scheme with HMRC. This is usually done alongside notification of options granted.

File scheme

Finalise the scheme and file it with HMRC to qualify for the advantages of EMI

Submit end of year returns

An EMI annual return must be submitted by your company by 6^th July of each year. This return must include an activity within the scheme that has occurred in the prior tax year. If nothing happens in the year a return should still be submitted stating this.

Start this process today with our EMI experts

Establishing an EMI share scheme within your business can be very rewarding, but it is not without its challenges, and it can take away the focus of running a business.

This is where our friendly and experienced team of experts can help you to set up and manage your EMI scheme, assisting employees in future if they wish to exercise options to ensure the maximum tax advantage is obtained.

To find out how our great people can help your great people enjoy great results from EMI schemes, please contact us.