What is an EMI?
An Enterprise Management Incentive (“EMI”) is an option to acquire shares granted by a company to an employee which fulfils certain conditions provided for by legislation and therefore qualifies for specific beneficial tax treatment.
The EMI scheme is aimed at small growing companies to help them retain and recruit staff and is intended to allow companies a large degree of flexibility over the terms on which options may be granted. This flexibility is reflected in the legislation and is in contrast to the other more prescriptive HMRC approved share schemes.
The tax benefits
Provided that the price at which an option may be exercised is no less than the market value of the shares in the relevant company at the date of grant of the option, then there is no income tax or national insurance charge for the employee at the time of exercise by reference to the difference between the value of the shares at the date of exercise and the (lower) exercise price (the “Spread”). In the absence of the EMI rules, this Spread would be taxable as income.
Instead, when the shares are sold, the employee will pay capital gains tax (the top rate is currently 28%) on the difference between the exercise price and the sale price.
If the employee also qualifies for entrepreneur’s relief (“ER”), the effective capital gains tax rate will be 10%. For employees who acquire their shares via EMI, the ER requirements are significantly relaxed: the 5% minimum shareholding requirement does not apply and the minimum holding period of 1 year includes the period during which the option has been held.
For the company, it should be able to obtain a corporation tax deduction for an amount equal to the Spread in the accounting period in which the option is exercised.
- Gross assets of the company (and its 51% subsidiaries) must not exceed £30m
- The company must be independent i.e. cannot be a 51% subsidiary of any other company
- The company must have only “qualifying subsidiaries”
- The company must carry on only qualifying trades and must not carry on “excluded activities” to a substantial extent (normally 20%)
- Excluded activities include:
- dealing in land, securities or other financial instruments
- financial activities
- licensing intellectual property (unless the IP has been created by the company or its group)
- legal or accountancy services
- property development
- hospitality or care homes
- providing services to those whose businesses consist of excluded activities
- The company must have fewer than 250 full time employees (or equivalent)
- The company does not have to be UK incorporated or UK resident but must have a permanent establishment in the UK
- Option shares must be fully paid up, non-redeemable ordinary shares
- Must be employed at the time of grant
- Must work at least 25 hours a week for the company (or 75% of their total working time if less)
- Must not (together with associates) hold a “material interest” (30% or more) in the company
- Must be in writing
- Must be capable of exercise within 10 years of grant
- Employee cannot hold EMI options over shares worth more than £250,000
- Company cannot have more than £3m of shares under option at any one time
Disqualifying events The legislation provides for certain disqualifying events which can lead to the tax benefits of an EMI being lost. If the EMI option is exercised within 90 days of such an event, then the tax benefits are retained. However, if it is not, gains in excess of the market value of the option shares at the date of the event are subject to income tax and potentially national insurance contributions. Also, the relaxation of the ER conditions will not apply. In any event, these relaxations will not apply if a disqualifying event occurs within a year of grant of the option.
Disqualifying events include:
- the company becoming a controlled subsidiary of another company
- the company ceasing to meet the trading activities requirement
- the employee ceasing to meet the qualifying conditions as to employment
- the employee leaving employment with the company
- variation of the option which increases the value of shares under option
- certain alterations of share capital or conversion of shares of the company under option
- grant of options under a “Company Share Option Plan” which when added to the EMI options takes the aggregate market value of shares under option over £250,000
- Grants of options must be notified to HMRC within 92 days of grant
- HMRC must agree valuation of shares at date of grant
- The company must make an annual return to HMRC by 6 July following each tax year.
- Notifications and returns must be done online from April 2014. An EMI Scheme in existence before April 2014 must first be registered online before any further grants can be notified.