Enterprise Management Incentives



What is EMI?

Designed for small entrepreneurial companies the Enterprise Management Incentive Scheme (EMI) is a tax-advantaged share option scheme. A company may grant options to selected employees to allow them to acquire its shares over a prescribed period enabling smaller companies to offer the scheme as part of the benefits package to attract and retain employees.

Which businesses can offer EMI?

A company can be quoted or unquoted and must meet the following criteria:

  • Be independent (not a 51% subsidiary of another company or controlled by another company or a company and persons connected to it).
  • Have gross assets of less than £30 million.
  • Have fewer than 250 full-time employees.
  • Have only qualifying subsidiaries: a company must hold more than 50% of the ordinary share capital of any companies it acts with, joint ventures can sometimes be problematic.
  • Trade wholly or mainly in the UK, but not necessarily UK resident.
  • Operate a qualifying trade. Certain sectors are excluded such as various financial services, property development and farming.

Eligible employees

To be eligible, an employee must work for the relevant company/group for at least an average of 25 hours per week or, if less, 75 of the employee’s working time. The employee must not hold, directly or indirectly, more than 30% of the ordinary share capital of the company.

Each employee can be granted options amounting up to £250,000.

Administration of the scheme

The options should be granted in writing between the company and the employee, stating the date at which the options are granted, the number of shares acquired and the price at which the options can be exercised.

Formal approval does not need to be obtained prior to beginning the scheme, however the company must notify HMRC within 92 days of the options being granted. HMRC then have a 12 month window following the 92 days to check the grant complies with EMI rules and to formally approve any share valuations in relation to the scheme. We recommend obtaining advance approval.

An annual return must be submitted within three months of the end of the tax year.

Tax and NIC treatment of an EMI option

Grant:

No Income Tax or National Insurance Contributions (NIC) are payable on the grant of an EMI option provided exercise takes place within 10 years from grant.

Exercise:

  • No Income Tax or NIC is due on exercise if the option was granted with an exercise price greater or at least equal to the market value of the option shares at the time of grant.
  • If a nil cost or discounted EMI option is granted, Income Tax will be payable when the option is exercised on the amount by which the market value of the shares at the date of grant (or, if lower, at the date of exercise) exceeds the exercise price.
  • Where shares are readily convertible assets, Income Tax will be collected under PAYE and both employer’s and employee’s NICs will be due.
  • The definition of a readily convertible asset is wide. It covers arrangements where an employee may sell for cash.
  • If a NIC liability arises, the company and the option holder may agree that the employee should bear the liability for the employer’s contributions.
  • Any increase in the value of the shares between the date of grant and the date of exercise is not charged to Income Tax irrespective of whether the option was granted at a discount or not.

Sale of shares:

On the disposal of the shares acquired under an EMI option, Capital Gains Tax (CGT) may be payable on any return made, in accordance with the current rates of either 18% or 28% depending upon other income and gains.

Entrepreneur’s Relief, which reduces the rate of capital gains tax to 10% on the first £10 million of gains may potentially be available on the disposal of shares acquired pursuant to an EMI option.

The rights attached to the shares can be restricted, such as they can be non-voting. They must be fully paid up and cannot be convertible or redeemable shares.



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Want to know more?

If you’re looking for good, reliable Enterprise Management Incentives advice, KJG are here to help you. We’re sure no matter how big or small your problem is we will resolve them.

0161 832 6221 info@kjgllp.com