Enterprise Management Incentive (EMI) Schemes
November 25th, 2021
How UK companies are using Enterprise Management Incentive (EMI) Schemes to grow their business
Enterprise Management Incentive (EMI) schemes are allowing innovative businesses to reward success in a tax-efficient manner by offering key people in the business a share in the company’s success. EMI schemes have surged in popularity in recent years as an effective way to drive recruitment and to incentivise existing staff.
The EMI scheme is Government-approved and tax-advantageous. It is predominantly used by small to mid-sized businesses looking to share their financial success with their team and specifically targeted at smaller high-risk companies.
By using an EMI scheme, a company can offer an effective uplift in earnings, without having to increase wages. This avoids increasing national insurance costs and employees’ income tax bills as there is no income tax or national insurance charge on the exercise of an EMI option (as long as it was initially granted at market value).
For companies focussed on international Land & Expand, the creation of a UK entity within the corporate group may enable the company to qualify for EMI status being attributed to their existing stock plan. If it does not, then please discuss with Briars to identify alternative solutions.
The total number of companies operating an Employee Share Scheme (ESS) in tax year ending 2020 was 15,340, this is an increase of 6% from the previous year. Within this number, EMIs were the largest contributor to the total cost of tax relief.
Employees received an estimated £530 million in Income Tax (IT) relief and £340 million in National Insurance contributions (NIC) relief in the tax year ending 2020 from tax-advantaged Employee Share Schemes (ESS)
How EMI schemes work
EMI schemes give the option to purchase shares at a price agreed in advance. The options can be converted into shares either immediately, at a point in the future, or upon the sale of the company.
Options can be granted under an EMI option agreement with the employee, to be read in conjunction with a set of scheme rules. When the value of the company (and so the shares) increases after having agreed the price, they can exercise their options and sell their shares at a profit.
Which companies can grant EMI options?
To be capable of granting options, the company must be an “independent trading company” with:
- gross assets of no more than £30 million; and
- fewer than 250 full-time employees.
Who can be granted EMI options?
EMI options can be granted to employees (not directors or consultants) who:
- do not have a “material interest” in the company and;
- work for the company for at least 25 hours per week, or 75% of their working time.
There is no income tax to pay on the grant of an option. Upon exercise, there is no income tax liability if the exercise price was at least equal to the market value of the shares at grant. Income tax would be due on any price difference if the exercise price is less than the market value of the shares at grant.
On the disposal of option shares, capital gains tax may be payable on the difference between the sale proceeds and the market value of the shares when they were granted.
Employers do not have to pay National Insurance Contributions on either the grant or exercise of the options and corporation tax relief is available when the options are exercised.
Before granting EMI options, the company must obtain clearance from HMRC to ensure that the proposed options meet the requirements for an EMI scheme. HMRC will need to confirm:
- that the company is a qualifying company; and
- the market value of the shares.
HMRC must also be notified once the options have been granted within 92 days, or the options will not qualify as EMI options and the tax reliefs will not apply.
What you need to do
Initially a company will need an HMRC-approved EMI Valuation [and scheme approval] prepared by their specialist advisor. Scheme rules and option agreements will need to be drafted, as will board minutes and completing the Companies House filings, where necessary.
The company’s articles of association must be reviewed and, if necessary, amended to ensure the EMI share options can be granted. Any shareholders agreement will also need to be reviewed and shareholder consent to grant the options obtained, if needed.
For assistance in making the correct preparations for granting EMI options, please contact Briars. We can help companies that meet the qualifying conditions to establish their share schemes and take full advantage of the benefits EMIs have to offer and for those who do not fit the criteria, we can discuss alternative solutions.