EMI Options

The EMI (Enterprise Management Incentives) scheme is a government endorsed share options scheme available to employers as a way for smaller companies to retain staff in competitive markets, especially the information technologies industries, for example, by providing them with a long term incentive. But EMI share schemes can only be used by UK companies who meet certain qualifying criteria:

  • The company must independent, i.e. one that is not controlled by any other company
  • Must also not have gross assets of more than £30 million.

Under the scheme, an employee can have up to £250,000 worth of shares, with a company limit of £3 million. The price that the employee will pay for the shares is determined when the option is granted, as is any income tax and NIC liability. In regards to income tax and NIC (national insurance contribution), as long as the options are granted with an exercise price equivalent to or higher than full market value at the date of grant, then neither is payable. However, upon disposal of the shares, the employee will usually be liable to pay 10% capital gains tax on their profits. However, the employee is able to use their annual capital gains tax exemption. Another benefit of the EMI scheme is that it allows a company to choose both the employees they wish to receive the share options and the quantity they want them to receive.

Once an employee reaches the £250,000 limit of EMI options, the employee cannot be granted any further EMI qualifying options until 3 years after the last option was granted, regardless of whether some of the options have been exercised or released. There is also a working time requirement which is based on the average working time of an employee. In order to be eligible for an EMI option, an employee must work for the company at least 25 hours a week or 75% of their working time. EMI shares must be held for a minimum of 12 months holding period.

Another advantage of the EMI scheme is in regards to entrepreneurs’ relief. When disposing of shares using the EMI scheme, an employee can qualify for entrepreneurs’ relief without having to meet the normal 5% minimum holding required for disposals of shares in a personal company.

This includes the option holding period, which means that should a company be sold, the shares are able to be acquired and sold quickly, and the employee is still eligible to enjoy the benefit of entrepreneurs’ relief. Additionally, another benefit of the EMI share scheme, which is not available for non-advantaged schemes is that HMRC are willing to agree the value of the shares in advance of an option grant.

For the EMI options to qualify for tax relief, HM Revenue and Customs (HMRC) must be notified of the grant of the options within 92 days of the date of grant. If HMRC are not notified, this will mean that the options are unapproved for tax purposes, and can lead to unintended and serious tax consequences for both the option holders and the company.

The company can normally receive a corporation tax deduction against taxable profits in the accounting period when options are exercised. Relief will be given on the difference between the market value of the shares at date of exercise and the exercise price (which would have been agreed when the options were granted).

Unapproved Options

While unapproved options can be seen as tax inefficient, they are very flexible and simple to administer. Unlike the EMI share options, unapproved share options do not need to meet any statutory requirements or limits. Therefore, there is no limit on the quantity of share options that can be given to an employee, but these share options will not be tax-advantaged. Unapproved share options can also be granted over shares in subsidiary companies. However, the company will still need to inform HMRC of the grant of the shares options on its annual return form.

Similarly to EMI options, unapproved options are not subject to tax on grant. However, on the exercise of the option, the employee will usually be liable for income tax and NIC on the difference between the market value of the shares at the date of exercise of the option and the option exercise price. Capital gains tax will also be charged on the increase between the date when the option is exercised and the time of sale. In a case where the date the option is exercised and the time of sale are simultaneous, then no capital gains tax will be charged, but there will be a charge to income tax. The employing company, as a condition of exercise, may pass the cost of their NIC to the option holder.

If the share options are in a privately owned company and there are no future arrangements for it to be sold, there will be no obligation to withhold NIC and PAYE. Also, unlike with other share option plans, a wider category of participants are eligible to receive unapproved options.

Unapproved share options can be particularly beneficial for employees who are ineligible under tax advantaged plans, and to provide options over types of share that would not qualify under tax advantaged plans. Unapproved share options can also be beneficial to companies who wish to provide their employees with share options in excess of the individual limits in plans such as the EMI scheme.

When the share options are exercised, the employing company will obtain a corporation tax deduction for the difference between the market value of the shares at the time (normally equal to the value of shares the employee is charged income tax on) less the amount the employee paid for the shares.

Summary

In conclusion, for a smaller company, it may be suggested that the best option of the two would be the EMI options share scheme, because it provides the employee with benefits in regards to tax, and also, will give the company a way to provide long term incentives to their employees. On the other hand, unapproved options schemes will be beneficial to companies that are larger and want to award their employees with options over the £250,000 limit and are a company that exceeds the £30 million limit in terms of gross assets.

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.