The Enterprise Management Incentive (EMI) scheme is an employee share option plan designed to help growing businesses easily offer equity stakes to employees.
EMI share plans are attractive to private technology companies because competitive equity plans help attract high-level talent and reward team members appropriately for their work. Employees with EMI share options are granted the option to buy shares in the company at a fixed price down the line. When an employee exercises their option to buy their shares, EMI reduces their overall tax burden.
But there are certain rules and restrictions that govern how companies can operate EMI schemes. Here’s a short rundown of the most important guidelines and deadlines to look out for.
Which companies quality for EMI?
To qualify for the EMI, companies must:
- Own assets worth no more than £30 million.
- Have 250 or fewer full-time employees. Part-time employees also count towards this total, in proportion with the average number of hours they work. (For example, if a full-time employee works 37.5 hours a week, and a part-time employee works 18 hours a week, the part-time employee counts as 0.48 of a full-time employee.)
- Be independently owned. In short, another company — or a person and a company they control — cannot hold 50% or more of ordinary share capital.
- Be permanently established in the UK. This can take the form of a brick-and-mortar business HQ, but a company can also qualify if it has a permanently UK-based agent, who has the authority to enter into contracts on the company’s behalf, and regularly does so.
- Actively engaged in a qualifying industry, with the aim to make a profit. Excluded industries include farming, property development, finance and legal services (including banking and accounting), steel or coal production, and forestry.
The EMI rules companies must follow
If your company fails to follow certain rules, your employees may not qualify for the tax benefits of the EMI scheme. To avoid this, make sure:
HM Revenue & Customs (HMRC) confirms the market valuation. It's strongly advised to agree a valuation with HMRC when setting up your EMI scheme. You should send HMRC a form with your proposed market valuation before granting options. If HMRC later determines that the market valuation (and subsequent strike price of the shares) was set below market value at the time of granting, your employees will have to pay income tax and possibly National Insurance when they exercise the options.
You use actual market value (AMV) to value share price at granting. When you report your valuation to HMRC, you need to supply two estimates. The actual market value (AMV) takes into account restrictions on the shares that might lower their value, whereas the unrestricted market value (UMV) ignores these. Base your proposed strike price on the AMV—the lower of these two numbers. This isn’t a matter of compliance: It simply helps to increase the profit your employees can make when they exercise their options.
You use UMV when assessing how many shares you can distribute. Under the EMI, companies can distribute shares worth a maximum of £250,000 to each employee over three years, and £3 million total. Use the UMV to calculate how many shares this equates to—or you could accidentally exceed the cap.
A disqualifying event may also cause employees to miss out on the tax benefits of the EMI. These usually involve changes in circumstances that mean the employee or company no longer meets the requirements for the EMI. For example:
- An employee leaves the company;
- The employee’s hours working for the company fall below the required threshold, i.e. an average of 25 hours per week or 75% of their total working hours;
- The company changes its activities so that it no longer meets trading requirements;
- Another party acquires a controlling stake in the company;
- The company exceeds the £250,000 per employee or £3 million total share cap.
Your EMI deadlines
There are several key deadlines companies deploying an EMI scheme must meet, to ensure their employees receive the tax benefits.
Ledgy makes it easier to keep track of these key dates, and to monitor the progress of the vesting period (the time between when the options are granted and when they can be exercised).
- Once HMRC has confirmed the valuation and the strike price, the company has 120 days from the date of the confirmation letter to grant the options at that price. (This was changed from 90 days as a response to COVID.)
- Once an option has been granted, the company has 92 days to notify HMRC. Ledgy prefills the notification form and reminds you to send it within the deadline. The option must be exercised within 10 years of granting. In the instance of a disqualifying event, employees must exercise their options within 90 days to still benefit from Entrepreneurs’ Relief, which reduces Capital Gains Tax (CGT) to 10%. If the employee misses this 90-day deadline, they will have to pay income tax and possibly National Insurance on any value the shares gain between the date of the disqualifying event and the date of exercise.
Once your EMI scheme is live, put these dates in your calendar – don’t fall foul of a technicality when your employees’ equity is concerned.
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