Enterprise Management Incentives (EMIs) are a tax-efficient approved employee share scheme that can be used to reward and incentivise valued employees in small and medium-sized companies. A company may offer an option to purchase shares in its own business or that of a subsidiary. The price of the shares under option is fixed on the date at which the options are granted.
EMI Eligible employees tends to be those that work for the company for a minimum of 25 hours per week or those that have a total working time of less than 25 hours per week but who spend at least 75% of that time working for the company. Any employee who has direct or indirect control of over 30% of the company’s ordinary share capital is not eligible for EMI options.
Incentive schemes, such as EMIs, can have a very positive effect on employee morale. Not only do they offer a tangible future pecuniary reward for past efforts, they also represent a stake in the company’s future. Furthermore, if the option price is set at a level that is well below the expected future sale price, they can be highly lucrative.
This depends on the terms of the option agreement. As one of the functions of EMI schemes is to incentivise key or valued employees to stay with the business, the right to exercise the option is generally set some time in the future. This may be after the employee has completed a specific number of years of service or it may be triggered by a particular event, such as the company’s listing on a stock market. However, even when the trigger event occurs, there is no requirement to exercise the options and employees are unlikely to do so where the shares have not increased in value.
Eligible individuals can receive options up to the value of £250,000 over a three-year period. Any Company Share Option Plans (CSOP) options held also count towards this limit.
If the employee chooses to exercise their options, no income tax or national insurance is usually payable either on grant or exercise. The requirement is that the shares must be bought for a sum that, as a minimum, matches their market value at the time the options were granted. If the employee receives a discount on the market value of the shares, they must pay income tax and national insurance on the difference between the market value and the price actually paid.
Selling the shares may attract capital gains tax if they are sold for more than they were purchased. However, Entrepreneurs’ Relief usually applies, which means that capital gains liability is reduced to the lower rate of 10%.
The tax benefits of an EMI scheme may be lost if:
- The company fails to set up the scheme within the terms prescribed by law;
- The company does not adhere to the 92-day limit for notifying HMRC of the grant of an EMI option; or
- A disqualifying event occurs and the option holders do not exercise their options within 90 days of that disqualifying event.
Any of the following may constitute disqualifying events:
- The company ceases to be independent if, for example, another company gains control of it;
- The option holder ceases to be an employee;
- The option holder can no longer fulfil the minimum working hours requirement;
- The option holder receives an additional grant of shares that takes their holding over the prescribed maximum limit;
- The option holder is left with over 30% of the company’s total share capital after other shareholders leave;
- The company’s activities change to include restricted activities;
- The company begins to trade mainly outside the United Kingdom;
- The terms of the options are altered;
- The company’s share capital is altered; or
- The company’s shares are converted
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