Enterprise Management Incentive (EMI) Share Option Schemes

Enterprise Management Incentive (EMI) share option schemes are designed to help small businesses attract, motivate, and retain key members of staff. These schemes are tax efficient and straightforward to administer, making them suitable for a wide range of companies.

How EMI schemes work

Share options under EMI schemes are issued to staff on a discretionary basis. Employees are given the opportunity to purchase shares in the company at a fixed price, which is typically the current value, at a future date—usually between three and ten years from the option grant. As the company grows, the value of these shares may increase, making the options even more valuable for employees. Importantly, restrictions within the share and option contracts ensure that the company retains control; options or shares cannot be transferred, and employees forfeit their options if they leave the company.

Benefits of EMI share option schemes

Rewarding key personnel through an EMI share option scheme aligns employee objectives with those of the company, particularly the goal of increasing company value. This also promotes staff loyalty within the organisation.

The grant of an EMI option is tax-free, and typically, neither the employee nor the employer faces tax or National Insurance contributions when the option is exercised, provided the option is granted at market value. Any growth realised after exercising the option is taxed as a capital gain, at 0% to 32% depending on the individuals circumstance, as opposed to employment income which could be taxed at rates up to 47%. This structure is significantly more tax efficient for employees.

Eligibility Criteria

To operate an EMI option scheme, companies must meet certain conditions:

• The company must be a trading company.
• The scheme must be established to attract or retain employees.
• The company’s gross assets must not exceed £30 million.
• The total value of shares under the option scheme must not exceed £3 million.
• The company must not be controlled by another company, though employees of subsidiary companies may be granted options in a parent company.
• The company must have fewer than 250 full-time employees.
• The company must not be engaged in excluded trades (such as dealing in land, property development, leasing, certain financial activities, farming, operating or managing hotels, or providing legal or accountancy services).

This list highlights the most relevant conditions for small businesses, though it is not exhaustive. Employees are eligible for EMI options if they spend at least 25 hours each week working for the company, or if less, at least 75% of their working time. Furthermore, employees must not own more than 30% of the company’s shares or hold EMI options with a value greater than £250,000 when the option is granted.

Outline of EMI scheme implementation

1. Initial discussion regarding the suitability of the scheme for the company and its objectives.
2. Provision of notes and advice on EMI schemes, including criteria and examples.
3. Meeting to discuss the scheme and its potential application to the company.
4. Written confirmation and explanation, with reworked examples specific to the company.
5. Engagement of solicitors to draft the share option agreement.
6. Decision on the quantity of shares to be issued, timing of exercise, and share buyback arrangements.
7. Consideration of whether shares will be Class A Ordinary Non-Voting Shares.
8. Decision on whether shares issued under options will be from directors (usually preferable) or issued by the company.
9. Agreement of terms and conditions for share buyback, including share valuation methods.
10. Review and agreement of all other terms in the draft share option/shareholders agreement.
11. Solicitors to redraft and review the share option agreement before issuing it to employees.
12. Addressing any queries raised by employees receiving share options.
13. Advance clearance of the company criteria for participation in the EMI scheme.
14. Review and planning regarding company purchase of own shares, including amendments to the memorandum and articles of association if necessary.
15. Provision of background information to support the valuation proposal and submission of form VAL 231 to HMRC.
16. Issuance of share options to employees, collection of signed agreements, and storage of agreements.
17. Notify HMRC within 92 days of granting EMI options using the ERS online service.
18. Accounting for any liability under share option agreements.
19. Completion and submission of an ERS return to HMRC every year, even if no changes occurred. This is due each year by 6 July.
20. Potential requirement for a valuation when the EMI option is exercised.

Please note that Green Accountancy cannot provide a share option agreement; companies will need to seek assistance from a solicitor for this work.

If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.