What is an EMI Share Scheme?
An Enterprise Management Incentive (EMI) share scheme is a government-approved scheme, introduced in 2000, which allows growing companies to attract and/or retain talented employees in a tax efficient manner.
Some of the key benefits of an EMI share scheme include:
The concept of an EMI share scheme is that companies grant the employee share options, i.e. the legal right to purchase a company’s shares within a specified period at a fixed price and subject to various conditions, such as performance or on a sale of the business. Therefore, if the company’s value increases over time, the employee could realise a substantial profit, thus incentivising them to join/remain with the company.
Recent HMRC statistics show that more than 14,000 companies use an EMI as part of their equity compensation strategy, demonstrating this is a well-trodden and acceptable route for incentivising employees.
The illustration below exemplifies the tax benefits of an EMI scheme to both employer and employee:
Angela was granted EMI share options in Pear Ltd on 1 April 2019 which stipulated she could buy up to 1,000 shares at £1 per share over the next 10 years. There are no tax implications for Pear Ltd or Angela on the grant of the options.
Four years later, Pear Ltd has had a very successful few years, and the share price has risen to £5 per share. As a result, Angela decides this is the opportune time to exercise her options, so she buys the full allocation of 1,000 shares at a total cost of £1,000.
At the time of exercise, the shares are worth £5,000 (1,000 at £5 each) yet Angela has only paid £1,000. However, the increase in market value of the shares between the date of grant and the date of exercise is exempted by the EMI scheme. Consequently, Angela has no tax liability on the exercise of the option.
As Pear Ltd issued shares at less than market value, it is entitled to a corporation tax deduction on the difference between the market value and price paid, i.e., £4,000 at 25%, resulting in a tax saving of £1,000 for the company.
Finally, if Angela decides to sell her shares in Pear Ltd in 2023, she will realise a capital gain of £4,000 based on the current valuation of £5,000 which will be taxable at either 10% or 20% depending on her marginal rate of tax and whether she qualifies for Business Asset Disposal Relief.
|Grant of options||No tax implications.||No tax implications.|
|Exercise of options||Must pay the exercise price agreed. No further tax implications.||Corporation tax deduction available on the difference between the market value of the shares and the exercise price agreed.|
|Sale of shares||Capital gains tax payable. (Care needed if options are acquired at less than market value, as income tax may be payable.)||No tax implications.|
As illustrated above, the commercial and tax benefits of an approved EMI share option scheme are substantial. However, as always, it is critical to ensure that tax advice is sought on the implementation and ongoing reporting of the scheme to guarantee that the qualifying conditions are being and continue to be met.
What are the EMI Qualifying Conditions?
There are certain qualifying conditions that must be met by the company for an EMI scheme to be implemented. Broadly, these are:
There are also specific qualifying conditions that need to be met by the employee if EMI options are to be granted to them. Broadly, these are:
Disqualifying Events for an EMI
Often, companies implement EMI share options but then do not ensure they continue to meet the qualifying criteria for relief detailed above. It is important that these criteria are reviewed on a regular basis and that the annual reporting to HMRC is completed to retain the share scheme’s approved status with HMRC. Failure to do so will result in the tax advantaged status of the EMI scheme being lost.
We recommend that a review of the company’s qualifying status is undertaken on a regular basis. Key areas where approval status is often lost include:
When a disqualifying event occurs, a participant’s options can be exercised within 90 days and still be treated as EMI options. If exercised within this timeframe, all favourable tax treatments will be retained, such as the employees not needing to pay income tax when exercising their options at the pre-agreed market value.
As such, if, for example, a reorganisation of the company structure is being implemented, then it will be critical that advice is obtained to ensure that the EMI share scheme continues to qualify for relief with HMRC.
If setting up an EMI scheme sounds like something you are interested in understanding further, it is important that you obtain full, comprehensive advice. We would be happy to schedule an initial call with one of our experienced tax consultants to discuss your options.
If you are interested but concerned you may not qualify for an EMI share scheme, don’t worry - if you do not qualify for an EMI share scheme, other options are available such as unapproved share schemes or growth shares.
Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice before taking steps to utilise an EMI within your own company.