HMRC figures show only a small minority of companies on the full list or traded on AIM have taken advantage of the great tax breaks offered by EMI, we suspect a lot more qualify so we look at how easy it is to meet the tests and what you can do with EMI if you meet them.
The Enterprise Management Incentive Plan ("EMI") was introduced in 2000, it is the most tax advantaged employee share option plan in the UK. The tax treatment is:
- No income tax on grant;
- No income tax on exercise (unless the option was granted at a discount and then only the amount of the discount on grant is taxed on exercise); and
- CGT on the sale of the plan shares.
In addition, the UK employing company will qualify for a statutory tax deduction equal to the gain on the exercise of the option (i.e. market value on exercise less the exercise price (if any)).
It is a popular misconception that companies on the full list or traded on AIM cannot qualify for EMI - they can if:
- they have gross assets of less than £30 million;
- less than 250 full-time (or full-time equivalent) employees; and
- they satisfy the other conditions, for a full description of these click here.
If a company breaches the gross assets or full-time employee tests it is not a disqualifying event, previously granted EMI options continue to qualify for tax relief. The breach merely means no further EMI options can be granted whilst the tests are not met.
Other conditions for EMI
The company must not be under the control of another and the business of the group as a whole must not consist wholly or substantially of "excluded activities". "Substantially" means more than 20% of the trade.
The company must have only “qualifying subsidiaries”, 50:50 joint ventures can cause difficulties if these are deadlock companies but we may be able to help in difficult cases.
There is no need for any group company to be incorporated or resident in the UK but at least one group company must carry out a "qualifying trade" (one carried out wholly or mainly in the UK with a view to making profits which is not wholly or substantially an excluded activity).
If the company ceases to satisfy these conditions it is a "disqualifying event". Options still qualify for the generous tax breaks if exercised within 40 days of the event, otherwise gains in excess of market value at the time of the event are subject to income tax.
HMRC will give prior clearance that the company meets the EMI conditions on application to the Small Company Enterprise Centre.
Limits and eligibility
There is no limit on the number of employees who may be granted EMI options but there is a limit of £3 million on the total value (measured at grant) of shares which may be subject to unexercised EMI options. A company with 10% of its shares subject to subsisting EMI options would need to have a market capitalisation of more than £30 million for this limit to be restrictive.
There is also an individual limit (now increased to £120,000 worth of shares) which may be subject to unexercised EMI options (any outstanding CSOP options held by the participant count towards this limit).
Participants must be employees within the group and must work at least 25 hours per week (or 75% of their working time, if less). There are various other conditions (e.g. reporting, type of shares which may be used etc.) but listed companies are likely to meet these.
Adapt your existing LTIP or unapproved option plan
It is another popular misconception that companies need to go to shareholders to approve a new plan if they wish to benefit from EMI.
The EMI legislation has been designed so existing unapproved option plans and even LTIPs can easily be adapted so they qualify for EMI. The legislation is very flexible and in most cases will enable companies to preserve the commercial provisions of their existing plans.
For unapproved option plans, all that is required is a few minor amendments which can be made by the board or remuneration committee without having to go to shareholders (assuming your plan has the usual rule which permits the board or remuneration committee to make tax favoured amendments).
EMI options can be granted at a nil or discounted exercise price so if your LTIP permits awards to be granted as nil cost options, it is straightforward to change the rules so these qualify for EMI. The discount on grant will be subject to PAYE and NIC on exercise but any gains in excess of the market value on grant will be income tax free.
If your LTIP is structured so participants receive “awards” (as opposed to nil cost options), companies need to change the rules so these are granted as nil cost options in the future but these changes should not require shareholder approval either.