The starting point for any company looking to implement a share incentive plan is EMI. EMI is fantastically flexible and tax efficient. But, if EMI will not work for you we do come up with next best.
Over the years we have implemented a great number of EMI options which have delivered sizeable payouts on exit for the employees.
The Enterprise Management Incentive (“EMI”) options and EMI schemes are incredibly popular with SME private companies. If you are thinking of providing shares to employees the starting point is always an EMI scheme. EMI options are versatile, tax efficient and hence popular. We work with employers and also with individuals who ask us to look over the paperwork for them.
We are always happy to discuss your requirements and provide an estimate of fees.
Please do call us to discuss.
Reasons for picking us
- We have dealt with a large number of EMI options. This is a core business area for Gannons and we have the experience you need.
- We can help you with aspects from the commercial drivers behind the EMI scheme through to implementation and tax.
- We focus on private companies and understand the relationships between company and shareholders. We also understand the need to be cost proportionate.
Our EMI option services
To help you decide if an EMI scheme is an idea for you we have explained a brief guide:
- Benefits of an EMI scheme;
- Requirements employers need to satisfy;
- Who can receive EMI options?
- Taxation under the EMI scheme;
- Valuing shares for tax purposes used in an EMI scheme; and
Benefits of providing EMI options
Studies show that companies offering an EMI scheme outperform those that do not. EMI schemes are very popular with private companies. Here are some of the reasons why:
The 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 options are tax efficient
Providing shares to employees under EMI options are tax efficient. Employers can claim corporation tax relief. Subject to limited exceptions, the effective capital gains tax rate for employees is 10% if they hold EMI options for at least two years.
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 by providing shares to employees which will hopefully realise a capital gain. 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 and directors 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
There is no income tax to pay when the options are granted or when they’re exercised to buy the shares. When an employee sells the shares, they will pay only 10% capital gains tax on any profit if they have held the options for at least two years. Without EMI the employee faces paying the applicable top rate of income tax instead.
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.
The government continues to support shares for employees under the EMI scheme, recently adding additional tax savings.
Requirements to set up an EMI scheme
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 provide shares for employees under 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.
If the business or individuals do not qualify we can look at alternatives.
Overall limit on awards under an EMI scheme
Any “qualifying” company can provide shares to employees 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.
Requirements for companies under EMI legislation
- 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 or full time equivalent 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.
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.
The company can be quoted or unquoted.
Qualifying trades for EMI schemes
Some trades do not qualify for EMI tax relief, including:
- Land dealing
- Property companies
A combination of qualifying trades and non-qualifying 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.
Who can receive EMI options?
Any employee, be they full time or part time or a director (subject to the minimum of 25 hours a week or 75% of time) can be provided with shares under the EMI scheme.
In view of the coronavirus (COVID-19) pandemic, and the fact that employees who are furloughed, working reduced hours or taking unpaid leave might not be able to meet these retirements, a time limited exception has been granted from 19 March 2020 to 5 April 2021 for employees and directors whose qualifying requirements would otherwise be affected.
HMRC will accept from 19 March 2020 that if an employee has been issued or is to be issued with qualifying share options and met or would met the working time requirements at the time of grant but for reasons connected to the coronavirus pandemic, the time which they would have spent on the business of the company but for the pandemic, will count towards their working time.
Taxation of shares for employees under the EMI scheme
EMI share options under an EMI option scheme are tax efficient for employees and employers.
Corporation tax savings can be substantial if the shares for employees under EMI option gain value. Companies providing employees with EMI options can also deduct the set-up and administration costs from their taxable profits.
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.
Business Assets Disposal Relief (Entrepreneurs’ relief) under EMI schemes
Business Assets Disposal Relief (Entrepreneurs’ relief) applies when the employee holds shares acquired under an EMI scheme, if they held the qualifying EMI options for over two years. The size of the shareholding under the EMI option does not matter, nor does the fact that the employee did not hold actual shares for two years.
Taxation of EMI options vs unapproved share options
When exercising unapproved options, employees usually miss out on the advantageous capital gains tax and Business Assets Disposal Relief (entrepreneurs’ relief) compared to EMI options under an EMI share scheme.
Valuing shares for tax purposes under the EMI scheme
Putting shares under an EMI option scheme requires a share valuation of the 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.
Hypothetical illustration of tax payable for EMI
Assume that the business is young, starting out, with no taxable value. EMI Options were exercised and sold on the same date.
|EMI Option granted over 30 shares with an exercise price of £1||No tax charge on grant||Nil|
|EMI Option exercised over 30 shares and immediately sold for £2,000 each (total proceeds of £60,000) |
Less: exercise price: (£1)
Shares acquired under EMI option sold
Tax due ignoring annual allowance
|CGT is payable on disposal of the shares||CGT paid by employee: £6,000|
|NET PROCEEDS RETAINED BY THE EMPLOYEE UNDER EMI OPTION PLAN||£53,999|
|Employer claims a corporation tax deduction of £59,999 in year of exercise||CT deduction @ say 18% = £10,800|
Dual-qualified in the UK and USA and a qualified solicitor since 1998, Helen is a partner and heads up the corporate team, advising start-ups, SME companies, partnerships, entrepreneurs, investors and shareholders.