Enterprise Management Incentive
An Enterprise Management Incentive (EMI) scheme is an employee share option scheme. It is designed to help small, higher risk companies recruit and retain employees who have the skills to help them grow and succeed. The options are very tax advantageous and can also be a method for rewarding employees for taking a risk by investing their time and skills.
How do they work?
Tax advantaged share options with a market value of up to £250,000 from 16 June 2012 (£120,000 prior to 16 June 2012) may be granted to a qualifying employee of a qualifying company, subject to a total share value of £3 million under EMI options to all employees.
The shares must be in an independent trading company that has gross assets of no more than £30 million.
The grant of the option is tax-free and there will ordinarily be no tax or National Insurance Contributions for the employee to pay when the option is exercised. Furthermore, there is no National Insurance Contributions charge for the employer either.
The employer must notify Her Majesty’s Revenue & Customs (HMRC) of an award of EMI options within 92 days of the grant of the option.
Lastly, it must also be adhered to that the company whose shares are the subject of the option must be independent, and the company or group must be trading.
There are certain Companies which are unable to offer EMI’s as they fall into ‘excluded activities’, such activities are:
- property development
- provision of legal services
- ship building
To qualify for EMI, an employee has to be employed by the company whose shares are the subject of the option, or by a subsidiary.
An employee must spend at least 25 hours a week working for the company or the group. If his hours are shorter, he must spend at least 75 per cent of his working time working as an employee for the company or group.
Once an employee has been granted EMI, or EMI and Company Share Option Plan (CSOP) options up to the £250,000 from 16 June 2012 (£120,000 prior to 16 June 2012) limit, they must wait until three years after the last of these options was granted before they can be granted any EMI qualifying options, even if they have exercised or released some of the options. They can then be granted further EMI options to the extent that any other EMI or CSOP options then held by them are below the £250,000 limit.
Directors are classed as employees of a company, and so as long as directors meet the criteria set out for employees they will also qualify for EMI.
Condition an option has to meet to qualify for EMI
There are a number of conditions an option must meet listed below:
- type of share
- capable of exercise within ten years
- terms of option to be agreed in writing
- non-assignability of rights
Determining market value
The market value of any shares for this purpose is the price they might reasonably be expected to fetch on the open market, free from any restrictions or risk of forfeiture to which they may be subject.
Type of share
The option must be a right to acquire shares that are part of the ordinary share capital of the company, and are fully paid up and not redeemable.
The option must be in the form of a written agreement between the person granting the option and the employee. The agreement must be retained by the company so that it can be inspected by HMRC if an enquiry is opened into the option. The agreement must state:
- The date the option is granted.
- That it is granted under the provisions of Schedule 5.
- The number, or maximum number, of shares that may be acquired.
- The price (if any) the employee will pay to acquire the shares, or the method by which that price will be determined.
- When and how the option may be exercised. Can structure the EMI option as ‘exit only’.
- Any conditions (including performance conditions) affecting the terms or the extent of the employee’s entitlement.
- Any restrictions on the shares. If the shares are subject to a risk of forfeiture, the agreement must contain details of the conditions. Shares are subject to risk of forfeiture if the interest in shares that may be acquired is only conditional within the meaning of s423 Income Tax (Earnings and Pensions) Act 2003.
A disqualifying event restricts tax relief. The following are classified as disqualifying events:
- Loss of independence
- The company no longer meets the trading activities requirement
- The employee is no longer eligible
- Changes to the terms of the option
- Alteration to the share capital of the company
- A conversion of shares or grant of a CSOP option that takes the option holder over the £250,000 limit
Income Tax and National Insurance contributions
As mentioned previously, the option can usually be structured so that there is no Income Tax or National Insurance contributions charged on the grant of a qualifying EMI option.
If an EMI option is exercised within ten years and there has been no disqualifying event, there could be no Income Tax or National Insurance contributions due, provided that the employee buys the shares at a price at least equal to the market value they had on the day the option was granted.
If the option is a replacement option, it must be exercised it within ten years of grant of the original option (S530 ITEPA 2003).
Charges may arise when:
- The option price is less than market value of the shares when they are granted. The taxable amount is the lower of, the amount of the discount and the difference between the market value of the shares at the date of exercise and the amount paid for them
- The shares under option are free
- There is a disqualifying event
Sale of shares:
Capital Gains Tax (CGT) is normally payable on a gain that arises on the sale of qualifying shares following the exercise of the qualifying EMI options. Entrepreneurs Relief generally applies to gains arising on the exercise and sale of EMI options / shares provided all the relevant conditions have been met including the twelve months holding period, thus, providing an attractive 10% CGT rate on gains (after a deduction of the annual exemption and losses, if applicable).
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.