EMI schemes: Enterprise management incentives

What is an EMI scheme?

EMI option schemes are designed to help trading companies provide their people with significant tax benefits compared to other share arrangements. EMI schemes help companies with growth potential to recruit and retain employees.

How do EMI schemes work?

EMI schemes can be used by independent quoted or unquoted companies with gross assets of £30m or less. A company can obtain ‘advance assurance’ that it qualifies for EMI. A company or group must have fewer than 250 full-time equivalent employees to use the scheme, and all employees must work at least 25 hours a week, or 75% of their total working time for the company. Up to £250,000 worth of shares can be granted to each individual, and the limit on the total value of options that can be granted under an EMI scheme is £3m.

Generally, no income tax or national insurance contributions (NIC) liabilities arise on grant or exercise of market value options. Capital gains tax (CGT) at 20% will be payable on sale of the shares unless you have held your option for 24 months and then you should qualify for Business Asset Disposal Relief and a 10% tax rate on the first £1m of gain.

The market value of shares can be agreed in advance, and provided conditions are met, a corporation tax deduction should be available to the employing company in the period in which the employee realises a gain. 

Qualifying companies

EMI is available to quoted and unquoted companies with gross assets of £30m or less. In a group, the gross assets test is applied to the group (excluding intra-group transactions). 
 
The company must carry on a qualifying trade and there are detailed provisions for this. Examples of trades that do not qualify include leasing, farming, financial activities and property development. 

In a group, EMI share options must be granted over shares in the parent company, and at least one of the trading subsidiaries must carry on a qualifying trade. 

A company granting EMI options must not be under the control of another company. However, the parent company of a qualifying group can grant EMI options to group employees. 

Qualifying options

Options must be granted to employees or directors over ordinary shares that are fully paid and not redeemable. The shares can, however, be subject to restrictions. 

Only EMI options over no more than £250,000 worth of shares per individual qualify for EMI treatment. Options can be granted at a discount or nil price, although there are adverse tax consequences. Options must be capable of being exercised within 10 years.

Who can be granted EMI options? 

EMI options can only be granted to employees who are required to work for at least 25 hours a week, or, if less, at least 75% of their working time must be for the company. Employees who have a ‘material interest’ of more than 30% of the share capital before the options are granted are excluded from participation.

Employee taxation

The tax benefits of EMI schemes are very generous, with no income tax or NIC at the date of grant; and none on exercise if the exercise price is no lower than market value. If the option is granted at a discount, income tax and NIC are payable at exercise on the amount of the original discount or the gain on exercise if that is lower. It is possible for the employer to transfer its NIC liability to their employees.

When the shares are disposed, any increase in value from the market value at date of grant will usually be liable to CGT at the Business Asset Disposal Relief 10% rate of tax (on the first £1m of capital gain). If the sale takes place within 24 months from the date of grant (or the £1m lifetime limit for Business Asset Disposal Relief has been utilised), the standard rate of 10% and/or 20% will apply depending on whether the individual is a standard or higher rate taxpayer.

If the company or individual does not meet the qualifying criteria throughout the life of the option, income tax is payable on the gain during the non-qualifying period.

Potential pitfalls of EMI schemes

EMI schemes provide generous tax and NIC reliefs for qualifying options. However, there are a number of disqualifying events that limit these reliefs. Disqualifying events include: 

• The company coming under the control of another company
• The company ceasing to meet the trading activities test
• The employee ceasing to be an eligible employee
• A significant variation in the terms of the option (see below)
• A non-commercial alteration to the share capital of the company that increases the value of shares under option. 

If the option is exercised within 90 days of a disqualifying event, full income tax and NIC benefits are maintained. If the option is exercised more than 90 days after a disqualifying event, then relief is only given up to the date of the disqualifying event. It is essential that companies and option holders keep reviewing their EMI arrangements. On a sale or takeover, it is possible to have an exchange of options that protects the tax reliefs. This should be provided for in EMI option agreements.

If you would like to explore creating an EMI scheme for your business, you can get in touch with our expert team, who will be happy to help.

Varying an option – clarity from HMRC

Many EMI scheme rules contain discretionary powers that allow the board to determine “when” and “to what extent” subsisting EMI options will be exercisable. These powers can generally be used to amend  

1. when an EMI option can be exercised (or the event that triggers exercise); 
2. the vesting dates; 
3. the performance conditions; and 
4. the good/bad leaver provisions.  

The powers provide useful flexibility to clients to “reset” and “flex” granted EMI options to ensure relevance to changing company performance and the wider business environment (for example, by resetting performance conditions as commercial circumstances change). 
 
Until recently, HMRC’s published guidance stated that there are circumstances in which the use of such discretionary powers could trigger EMI options to be treated as though they had lapsed, from a beneficial tax perspective, where the change to the terms is so fundamental as to constitute the grant of a new option. This would mean the beneficial tax treatment on historic gains would be lost on the subsequent exercise.  
 
Due to uncertainty over how this guidance should be applied in practice, HMRC has published updated guidance on the “principles” they will apply when assessing whether the exercise of a discretionary power by the board triggers a change to the EMI status of subsisting EMI options when they are exercised.  

The guidance now sets out the following key principles on the use of discretionary powers: 

1. The exercise of discretion to accelerate vesting or to vary or waive a performance-related condition is generally acceptable, provided the exercise date is not brought forward. 
2. Varying or waiving of performance-related vesting conditions applying to EMI options will generally be acceptable. 
3. Where the board has complete discretion under the scheme rules to choose the circumstances or timing under which an EMI option may be exercised, the exercise of this power will be regarded by HMRC as a lapse and regrant of a new EMI option. 
4. HMRC has confirmed that it is not acceptable to amend the EMI option rules or use discretion to create a new right of exercise, introduce a discretion clause where none existed before or to change “when” the EMI option can be exercised, unless the amendment does not involve an improvement to the rights of the option holder that is more than de minimis. 

HMRC’s approach to discretion has highlighted an important distinction between (a) changes to vesting rights or performance conditions that may increase the number of shares that can be acquired on the exercise of the EMI option, but does not accelerate the point from which the EMI option can be exercised (which will not impact on the EMI tax treatment); and (b) changes to vesting rights or performance conditions that mean that the EMI option can be exercised at an earlier point than it otherwise would have been exercised or gives a new right of exercise (which will have a negative impact on the EMI tax treatment). 

The main practical impact of the updated guidance is that employers can expect to be challenged by HMRC on the tax treatment of their EMI arrangement if the vesting term of an option is amended to bring forward the date on which the EMI option can be exercised.

Administration of EMI schemes

Notification

Although EMI plans are not approved in advance by HMRC, options must be reported electronically to HMRC following the grant. We suggest that the market value of shares in unlisted companies is agreed in advance with HMRC Shares Valuation.  

You must notify HMRC of the grant of an EMI option within 92 days of the date of grant if the option was granted before 6 April 2024. 

HMRC announced that this deadline will become 92 days from the end of the tax year of grant for options granted from 6 April 2024. As such, for an EMI option granted on or after 6 April 2024, you must tell HMRC about this on or before 6 July following the end of the tax year in which the grant was made.  

Whilst the above date aligns to the annual reporting obligation, the notification of EMI options is still a separate process from the annual return, and therefore we would recommend that companies continue to notify the grant of EMI options to HMRC as soon as possible after they have been granted to ensure that this reporting is not overlooked. The consequences of failing to notify an EMI option mean that it would fail to subsist as a ‘qualifying’ EMI option and lose the tax-favoured treatment. 

Working Time

From 6 April 2023, the requirement for an employee who has acquired EMI share options to sign a working time declaration has been removed. Employer companies are no longer required to declare that an employee has signed a working time declaration when they have been issued with an EMI option, and are no longer required to retain the signed working time declaration and provide the employee with a copy. This amendment does not remove the working time requirement itself. 

Restrictions

From 6 April 2023, the requirement for employer companies to set out details of any restrictions on the shares that can be acquired was removed. Employer companies are no longer required to detail within the share option agreement the details of any restrictions on the shares that can be acquired.  

However, many companies still make employees aware of any restrictions attaching to the shares and also actively monitor to ensure that EMI option holders continue to meet the working time requirement (failure to meet this during the life of an EMI option would be a disqualifying event for that optionholder and mean that the tax-favoured treatment would be partially lost). 

 

 

Expert advice on Share Plans and Incentives

If you have any questions about EMI, or any other share plans for your business, please get in touch – our team of specialists will be happy to help you.

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