The Finance (No.3) Act 2010 received Royal Assent on 16 December 2010. It contains a relaxation to the qualifying conditions for enterprise management incentive (EMI) options. These changes are of interest to non-UK companies operating share option plans in the UK.


EMI options are a flexible and attractive way of incentivising UK employees. The tax treatment of participants is very favourable:

  • no income tax or social security on grant;
  • no income tax or social security on exercise;
  • CGT on the sale of option shares (with no minimum holding period); and
  • a corporation tax deduction for the employer on the spread (even though the participant is relieved from income tax and social security).  

It is possible to grant options at a discount to the market value of the shares on the grant date but in that case, the discount on grant is subject to income tax (and, if the shares are readily convertible assets, to PAYE and social security) on exercise.

We have considerable experience of advising US companies on structuring share option plans so as to qualify for EMI. This is usually straight-forward to achieve by drafting a special qualifying option agreement which modifies the rules of the main plan so as to qualify for relief. A form EMI 1 has to be filed with the Small Companies Enterprise Centre within 92 days of grant for options to qualify. The market value of shares as at the grant date has to be agreed with HMRC but, in our experience, HMRC will usually accept section 409A valuations for these purposes.

The parent company has to meet certain conditions, broadly, before 16 December 2010, it had to:

  • be independent;
  • have less than 250 full-time employees (or equivalent);
  • have gross assets of less than £30 million;
  • not carry out certain "excluded activities" to a substantial extent; and
  • have at least one company in the group which carried out a qualifying trade wholly or mainly in the UK.

Click here to view our EMI fact card which describes the EMI plan and our briefing note which sets out the conditions in more detail.

The last condition caused problems for parent companies with no group company trading wholly or mainly in the UK. It used to be necessary to establish a UK service company which charged a mark-up for employing UK employees to allow the test to be met.

Following the amendment (which came into force from 16 December 2010), the requirement has been replaced with the easier condition that the parent company must have a permanent establishment in the UK.


You may have seen this development reported on before. The amendment was proposed originally for inclusion in the first Finance Act of 2010 but had to be dropped at the last minute due to lack of space.

Companies that meet the EMI conditions should ensure options are granted to UK employees so as to qualify for EMI. This is straight-forward to do and makes the options much more attractive to participants.