EMI options are fantastically flexible and tax efficient for employers and employees alike. We guide on the best choices for you.
Some of our EMI options have delivered sizeable payouts on exit for the employees.
We offer a full service you can pick from covering design, implementation, drafting the agreements and tax. There is no need for multiple advisers.
Why are EMI options so popular?
Enterprise Management Incentive (“EMI”) schemes for granting EMI options are incredibly popular with SME private companies. If you are thinking of providing shares to employees the starting point is always an EMI option. EMI options are popular because they are versatile and tax efficient. But, there are conditions that must be satisfied to secure the generous tax benefits. We work with employers and also with individuals to look over the paperwork to make sure the conditions are met.
Our specialist EMI option lawyers are always happy to discuss your requirements and provide an estimate of fees. Please do call us to discuss.
What I need to know about EMI
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.
Who benefits from EMI
Shareholders, employers and employees all benefit if the business grows in value. 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:
Flexible is flexible
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.
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 requirements, a time limited exception has been granted.
HMRC will accept 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.
Tax is saved with EMI options
Employers and employees can achieve substantial tax savings with EMI.
Employers save corporation tax
Corporation tax savings can be substantial if the shares for employees under EMI option gain value. This will prove more important than ever when corporation tax rises to 25% in 2023. Companies providing employees with EMI options can also deduct the set-up and administration costs from their taxable profits.
If 20 employees made a gain on the sale of their employer of £90,000 each in 2023 when the rate of corporation tax is 25%
- The corporation tax saving is 20 x 90,000 = £1,800,000 @ 25% = £450,000.
This can prove attractive for a buyer of a company. The corporation tax savings are in addition to the employers’ NIC that would otherwise be payable on earnings.
Employees save income tax and national insurance
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. Profits made by the employees will be assessed to capital gains tax at 10%.
On a per employee basis the position for an employee making a £90,000 gain could look like:
|Non-tax-advantaged option||EMI option|
|Value on grant 2021||£10,000||£10,000|
|Exercise price paid in 2023||£10,000||£10,000|
|Value of shares on exercise||£100,000||£100,000|
|Income tax/employee social security paid on exercise (40% and 2%)||£37,800||£0|
|Employer social security on exercise (13.8%)||£12,420||£0|
|Shares sold on exit in 2023||Proceeds £100,000||Proceeds £100,000|
|Capital gains tax on sale||£nil||£9,000|
|TOTAL INCOME TAX||£42,800||£NIL|
|TOTAL NATIONAL INSURANCE||£12,420||£NIL|
What limits can you impose on EMI Options
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.
Why will EMI options reduce payroll costs
An EMI scheme enables employers to supplement pay by providing EMI options which carry the the opportunity for the employees to enjoy a windfall if the company does well. We find that employers who do not offer options alongside pay and bonuses often discover their staff joining competitors.
Do employees have to pay anything
EMI options can be awarded at “nil cost”. Nil-cost means employees pay nothing to exercise and acquire shares. If the company does not perform the options can be left to lapse causing no wasted expenditure for the employee.
What will my investors think?
Professional investors tend to be familiar with EMI schemes. 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.
What is the interaction between 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.
Continuing government approval
The government continues to support shares for employees under the EMI scheme, recently adding additional tax savings. There will be a more detailed review of EMI in consideration of extending the relief to more companies.
What is needed to qualify for EMI option tax reliefs
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.
What are the key qualifying requirements for EMI tax relief
- 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.
- 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.
How are shareholders protected
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. We will also look at the articles and shareholders’ agreement to make sure that blends in for all types of shareholder.
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