Enterprise Management Incentives (EMI) schemes are intended to help smaller companies with potential for growth to recruit and retain high calibre employees and to reward employees for taking a risk by investing their time and skills in helping small companies to achieve their potential.
Available to high-risk independent trading companies which are not under the control of any other company, and whose gross assets do not exceed £30m.
There is no limit on the number of key employees that can be given options to acquire shares in the company, at, or less than, the market value of the shares at the date the options are given to them.
The total value of the shares over which options are granted to each employee cannot exceed £250,000, with an overall total of £3,000,000; and they must be exercised within 10 years.
It is recommended that agreement of the valuation of shares subject to options is obtained from HMRC before implementing an EMI scheme, so that income tax charges do not arise later down the line.
Voting restrictions can be placed over the shares subject to options to protect the owner-managers’ position.
The company can choose exactly who receives an option (subject to the material interest barrier) and they can be granted conditionally subject to performance, time or eventcriteria.
The company must notify HMRC within 92 days of the options being granted
Formal HMRC approval is not required, but it is possible to obtain an Advance Assurance that the company (not the employees) will meet the EMI qualifying requirements.
An employee will be eligible for EMI options if they are employed by the company for at least 25 hours a week, or if less, for at least 75% of their working time, and do not own more than 30% of the share capital.
There is no tax or national insurance charge on the grant of the share option. Similarly, there will be no tax or national insurance charge on the exercise of an option unless the option was granted at less than market value, in which case there will be charge to income tax on the difference (collected through self-assessment where the shares are not ‘readily convertible assets’).
When the shares are sold, any capital gain arising should qualify for Entrepreneur’s Relief, provided the employee owns the option for at least two years prior to the date of disposal of the shares.
On exercise, the company will obtain a corporation tax deduction for the difference between the market value of the shares at that time less any amount paid by the employee for the shares.