Problems with EMI options when selling a business

Companies set up EMI (Enterprise Management Incentives) share plans thinking EMI options will benefit employees on an exit. The employers then forget about the EMI options until the exit arrives. Therein lies a nasty shock if pre-emptive steps have not been taken.

People who are selling their business are often surprised by the size of the due diligence checklist presented to them by the potential buyer. One focus area in particular that may be a shock to the sellers is the due diligence on the company's EMI options and employee share awards.

If your business has an EMI Scheme and you are considering sale of the business you should proactively prepare for issues relating to the EMI Scheme. We can help and deal with a large number of business sales every year. Please do get in contact.

Potential pitfalls on sale or exit where there are EMI Options

If the buyer of a business is in any doubt as to the tax treatment of EMI options they will typically err on the side of caution to avoid any questions from HMRC around EMI issues. At best there will be substantial delays in the sale process caused by issues around EMI, so business sellers should plan well in advance and sort out any issues.

In our experience, common areas where mistakes will be made along the way are :-

• Failure to make annual filings via ERS online - Each year, a company must update HMRC to advise of any changes (or none) to the EMI schemes in place. This must be filed on the PAYE Online by 6th July each year. If this has not been done, it may be possible to pay a fine and remedy the situation, however it is recommended that this is not left to a time when it may hold up the sale of the Company.
• Incorrect filings of the EMI option grant in the first place - All EMI option grants must be filed with ERS online within 92 days. This is a two stage process, the first filing is to get a unique reference for the scheme which is posted by HMRC, the second is to actually record the options. Unfortunately, some companies are tripped up by thinking only the first filing is needed. It may be possible to obtain a late excuse code from HMRC, but again this takes time to come through.
• Disqualifying events - There are various areas which can make an EMI Option that was qualifying when granted into a non qualifying option before it is exercised. These can include where there has been an investment from a VC or corporate investor who has bought over 50% of the shares in the company. The company is no longer independent, and so the EMI options are non-qualifying. Another possibility is where a company tries to expand by acquiring shares in another company. All subsidiaries of an EMI company must be controlled by that company, meaning that if the company acquires 49% or less of another company it will also become non-qualifying.
• Changes in employee roles - EMI schemes are designed for employees or directors working for more than 25 hours per week (or 75% of their time) in a business. If the employee falls below this threshold of time spent or  changes their role (for example, by becoming a contractor) they would no longer benefit from the EMI tax reliefs.
• Change in trade - A key area to consider is whether the trade of the company has changed so that the company is no longer an EMI qualifying company. The list of trades that will cause the EMI option to fail include legal and accountancy services, dealing in land or shares or property development.
• Timing - the time period between grant of options and exercise of options can raise questions as to the applicability of the general exclusion from tax benefits if the EMI options were granted for tax avoidance purposes. You may need to demonstrate that this was not the case and make sure you have decent paperwork and board minutes in place to support the position.

If you are gearing up for an exit it is well worth reviewing your EMI options whilst you have time to put things right. We are experts in this area offering a very competitive service by run by specialists. Please do get in contact to discuss. 020 7438 1060.