If you are thinking of awarding equity to staff the starting point is always an EMI scheme. EMI options are versatile, tax efficient and hence popular.  The Government continues to support the EMI scheme, recently adding additional tax savings.

Benefits of an EMI scheme

Studies show that companies offering the EMI scheme outperform those that do not. EMI schemes are very popular with private companies.  Here are some of the reasons why:

EMI scheme is discretionary

The EMI scheme is discretionary. This means that employers are not required to offer EMI options on equal terms to every employee or director.  This makes EMI schemes very flexible.

EMI scheme is tax efficient

EMI options are tax efficient. Employers can claim corporation tax relief. Subject to limited exceptions, the effective tax rate for employees is 10% if they hold EMI options for one year.

Companies planning to exit

EMI schemes can be designed to fit most exit objectives.  Many of the EMI schemes we implement are exit only – that means it is only when the company is about to be sold do the employees exercise their EMI options and become shareholders.  The employees then go onto immediately sell their shares along with other shareholders on sale. There are established ways to ensure that no employee can hold up the sale.

EMI options can supplement salary

There is a skills shortage, yet the pressure to limit expenses remains intense.  An EMI scheme enables employers to supplement pay with share benefits.  Employers who do not offer options alongside pay and bonuses often discover their staff joining competitors.

EMI options can be free for employees

EMI options can be awarded at “nil cost”. Nil-cost means employees pay nothing to exercise and acquire shares..

EMI schemes are investor-friendly

Professional investors understand EMI options as they are well established. Often investors expect senior management teams to be motivated with EMI options. Usually, investors agree to dilute their investments to free up shares for employees.

Employees lose nothing with EMI scheme

An EMI scheme can run in tandem with the SEIS/EIS schemes.  Apart from the fact that EMI is designed to reward employers and SEIS/EIS designed to reward investors the qualifying trading conditions are fairly similar.

EMI options and the SEIS or EIS scheme

An EMI scheme can run in tandem with the SEIS/EIS schemes.  Apart from the fact that EMI is designed to reward employers and SEIS/EIS designed to reward investors the qualifying trading conditions are fairly similar.

Requirements employers need to satisfy

In order for your employees to benefit from EMI tax relief under the EMI scheme both the company granting the options and the employee receiving an option must qualify.

It is possible to implement an EMI scheme over parent shares for the benefit of employees of all or any subsidiary.

The rules are detailed but we set out a simplified snap shot for you.  There are always grey areas but we tackle these for you.

Overall limit on awards under an EMI scheme

Any “qualifying” company can grant EMI options under the EMI scheme for shares valued up to £3 million.  The calculation is performed at the date of grant of an EMI option and is not re-calculated during the life of the EMI option.

Corporate structure requirement for EMI schemes

  • The company must not be under the control of another company. Any subsidiaries must be 51% controlled.
  • Only companies employing fewer than 250 full time equivalents can offer EMI options. Part-time employees count proportionately.
  • The company must trade wholly or mainly in the UK.
  • Gross assets must be less than £30 million.

Dilution

HMRC do not place any limit on dilution providing that the limit on value is not exceeded.  However, dilution is an important area to review from a shareholder protection aspect.

Trading status

The company can be quoted or unquoted.

Qualifying trades for EMI schemes

Some trades do not qualify for EMI tax relief, including:

  • Banking
  • Farming
  • Insurance
  • Land dealing
  • Leasing
  • Property companies

Mixed trades 

A combination of trading and non-trading activities may not preclude eligibility.  It is a matter of fact and degree which we can deal with for you based on past experience.

EMI options and partnerships

Partnerships are not companies so they do not qualify for EMI options under the EMI option scheme. There are ways to incentivise partners of LLPs and partnerships which can be used in place of shares.

Adoption of EMI schemes by international groups

International groups with UK subsidiaries can implement an EMI scheme over the parent company shares or stock for UK employees.

But, it is important to check that the group will qualify under the EMI legislation.  We do sometimes find that there are disqualifying factors for international groups such as the UK work force being too large.  We will check the position for you.

Who can receive EMI options?

Any employee, be they full time or part time or a director, will qualify under the EMI legislation. Consultants, many non-executive directors and employees with several jobs may not qualify. If an individual does not qualify for EMI there are alternatives you can consider which we can discuss.

Taxation under the EMI scheme

EMI share options under an EMI option scheme are tax efficient for employees and employers.

For employers

Corporation tax savings can be substantial if the shares under EMI option gain value. Companies providing employees with EMI options can also deduct the set-up and administration costs from their taxable profits.

For employees

EMI options granted under EMI schemes are very tax attractive for employees. The benefits far out strip the tax position for unapproved options. This is one of reasons why EMI options are so popular.

Entrepreneurs’ relief under EMI schemes 

Entrepreneurs’ relief applies when the employee holds shares acquired under an EMI scheme, if they held the qualifying EMI options for over 1 year. The size of the shareholding under the EMI option does not matter, neither does the fact that the employee did not hold actual shares for a year.

Entrepreneurs’ relief of EMI option shares vs ordinary shares

EMI option holders are in a better position than ordinary shareholders who did not acquire shares though an EMI scheme:

  • Ordinary shareholder must hold over 5% of the ordinary voting share capital for over 1 year.
  • EMI option holders who sell shares are eligible for:
    • The annual capital gains tax exemption;
    • Entrepreneurs’ relief, if they qualify, on any gain over the annual capital gains tax allowance which is taxed at 10%, not the typical 20% capital gains tax rate.

Taxation of EMI options vs unapproved share options

When exercising unapproved options, employees usually miss out on the advantageous capital gains tax and entrepreneurs’ relief compared to EMI options under an EMI share scheme.

Valuing shares for tax purposes used in the EMI scheme

Putting shares under an EMI option scheme requires a share valuation of shares under the EMI option. The valuation affects the tax position so it is an integral part of an EMI option under the EMI option scheme.

EMI scheme recent work

Recently we set up the following EMI schemes:

  • Designed and implemented an EMI option scheme for a mobile communications company looking to retain two key software developers;
  • Prepared a UK arm of a multinational share option scheme over the shares of a Jersey based parent company;
  • Carried out a share valuation for the purposes of EMI share option grant for an online estate agent company;
  • Drafted an EMI share option plan for a food PR agency looking to increase employee retention rate;
  • Advised on the EMI option scheme eligibility of a CEO of a food chain company who also worked as a consultant in other businesses;
  • Implemented an EMI option scheme for the old management following an acquisition of a franchise outlet.

Enterprise management incentive schemes and EMI options can be effective and tax efficient. EMI schemes are known as the currency of choice amongst employee incentives.  We are happy to talk over your ideas with you.

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