The main features of an EMI scheme are as follows:
- EMI share options may be granted to employees who work at least 25 hours a week for the company (or, if less, 75% of their working time). An employee must control not more than 30% of the ordinary share capital of the company to qualify.
- Each employee can hold options over shares worth up to £250,000 at the time of grant. Note that options held under other HMRC approved share option schemes operated by the company will be counted towards this limit.
- A ceiling of £3 million is imposed on the total value of options that may be in existence at any one time.
- The option must be granted for commercial reasons in order to recruit or retain an employee. The option must be in writing, non-transferable and capable of being exercised within 10 years of grant. Also, the underlying shares must be fully paid, not redeemable and must form part of the ordinary share capital of the company. There are, however, no prohibitions on placing restrictions on the underlying shares. This means that performance conditions, sell back obligations and transfer restrictions can easily be imposed on these shares, giving companies the power to control what happens to their shares.
- Only ‘qualifying’ companies may grant enterprise management incentives. This means that they must satisfy each of the following requirements:
- Must be independent, i.e. not under the control of another company
- Gross assets must not exceed £30 million
- Must have less than 250 full-time employees
- Must carry on a qualifying trade in the UK, which broadly incorporates most trades, excluding leasing, financial activities and property backed businesses
6. There is no formal HMRC approval process, but notification of each grant must be given to the Revenue within 92 days after the date of the grant.
7. The tax advantages given by an EMI scheme are as follows:
- No tax or NI is payable on the initial grant.
- Tax will only be payable on exercise to the extent that the option exercise price is less than the market value of the shares at the date of grant. For example, if an option is given to acquire shares at some point in the next ten years at a price of £2 per share and the market value of those shares at the date of granting the option is £2.50 then tax will be payable at exercise on the notional gain of 50p per share. PAYE and NI charges will only arise in a case where the shares are readily convertible assets, i.e. generally speaking, listed shares.
- Will qualify for entrepreneurs relief on the ultimate disposal of the shares, provided at least one year elapses between the date of grant of option and the date of disposal. The normal 5% minimum holding requirement for entrepreneurs relief qualification is overridden.
8. In certain circumstances the tax and NIC relief will be withdrawn. Those circumstances will generally be where either:
- The company ceases to carry on a qualifying trade; or
- An employee ceases to spend at least 75% of their working time with the company. The charge arising can be avoided however, provided the option is exercised within 40 days of the disqualifying event.
With an EMI scheme, a qualifying employee can buy shares worth up to £250,000 without paying Income Tax or National Insurance on the difference between what they ultimately pay for the shares (when exercising the option) and what they’re actually worth.
Outside an EMI scheme, this difference in value would be assessed and taxed as additional salary, with Paye and Nic – so potentially very expensive. They will have to pay Capital Gains Tax if they sell the shares though.
EMI schemes are pretty flexible and often work along the lines of an employee being given an option to purchase x number of shares at today’s valuation £y per share. The option can then be exercised in x years time, dependent on their achieving whatever criteria, performance levels or KPIs you may agree to put in place. At the point the option is exercised, the company will hopefully have grown in value and the shares can then be bought at today’s lower price and the employee gets to share in the increase in value they have helped build.
To put this in place, we need to do a business valuation, work wth you to develop the heads of terms for the scheme, the KPIs, timetables and share quantities etc – before bringing in a solicitor to formalise things.