A Short Guide to Enterprise Management Incentives
Enterprise Management Incentives (EMI) are tax advantaged share options designed to help small higher risk companies recruit and retain employees with the skills that will help them grow and succeed. They operate through the use of share options, rather than transferring shares to employees directly. They are also designed to reward employees for taking a risk by investing their time and skills in helping small companies achieve their potential.
Share options allow employees to acquire shares at a fixed date in the future or following a predetermined event. The price that they will pay to acquire their shares is determined at the start of the process when the option is granted and in almost all cases, so is any income tax and NIC liability that they will face. This gives all parties a welcome degree of certainty, as does the knowledge that the scheme is endorsed by the Government.
The use of options means that employees face no upfront exposure at all, with nothing to pay until the time at which they ultimately decide to exercise an option and acquire shares in their employing company. This contrasts very favourably with alternative routes to share ownership that will usually require a significant capital outlay before the employee can get any chance of involvement.
Under Enterprise Management Incentives (EMI)
- Tax advantaged options over shares with a market value of up to £250,000 may be granted to any number of employees of a company, subject to a maximum share value of £3 million under EMI option to all employees. The shares must be in an independent trading company that has gross assets of less than £30 million.
- The employer company can set any reasonable criteria on the exercise of options. Those options must be exercised within a 10 year period or they lapse
- EMI is a selective share scheme. This means that companies can choose which employees should be able to receive share options and how many options each employee should get.
- In addition to the tax breaks, the major advantage that EMI offers is to give employers the chance to target reward precisely. At the same time, this should enable them to offer incentives which make leaving their employment a much bigger decision than would be the case with only a standard salary package.
- The grant of the option is tax-free and there will normally be no tax or National Insurance Contributions (“NICs”) for the employee to pay when the option is exercised, providing they pay the agreed option price at grant date. In effect therefore any growth in the company between grant and option is locked in tax free for the option holder
- There will normally be no NIC charge for the employer.
- When the shares are sold at a gain any Capital Gains Tax charge may be reduced because Business Asset Disposal relief will normally start from the date that the option is granted. Providing other qualifying conditions are met the employee may then only pay 10% Capital Gains Tax on disposal.
- The employer must notify an award of EMI options to the HM Revenue & Customs (HMRC) within 92 days of the grant of the option.
For options to qualify for tax relief under EMI you need to ensure that:
- the option has been notified to the HMRC in time and as they require.
- the company whose shares are under option qualifies.
- the type of share under option qualifies.
- the employee is eligible.
- the terms of the option qualify.
If an EMI option is granted, the employer has to notify the HMRC within 92 days.
To qualify for EMI
For companies to qualify they must have gross assets of no more than £30 million – for groups, this applies to the assets of the group as a whole. The company whose shares are the subject of the option must be independent (it cannot be a subsidiary company), and the company or group must be trading. Companies carrying on certain trades will not qualify. The company cannot have more than 249 employees.
To qualify you must be an employee of the company whose shares are the subject of the option, or of a subsidiary. You must spend at least 25 hours a week working for the company or the group, or if you have shorter hours, you must spend at least 75% of your working time working as an employee for the company or group. You cannot have a material interest in the company, which is defined as a shareholding in excess of 30%.
For options to qualify, they have to be granted to recruit or retain an employee, and the option agreement has to provide particular information.
HMRC offer advance assurance on whether or not a company qualifies under the EMI legislation and it is possible to agree, in advance, the value of the shares subject to the option with HMRCs Shares Valuation Division.
A model agreement
No model agreement has been produced for Enterprise Management Incentives and therefore, individual agreements must be drawn up when share options are granted.
The requirements are:
Type of share – the option must be a right to acquire shares that are part of the ordinary share capital of the company, are fully paid up and not redeemable.
Option capable of exercise within 10 years – it must be possible for the option to be exercised within 10 years of the date of grant.
Terms of option to be agreed in writing – the agreement must be in the form of a written agreement between the company granting the option and the employee. The agreement must state:
- the date the option is granted.
- that it is granted under the provisions of Schedule 5 ITEPA 2003.
- the number, or maximum number, of shares that may be acquired.
- the price (if any) the employee will pay to acquire the shares, or the method by which that price will be determined.
- when and how the option may be exercised.
- any conditions (including performance conditions) affecting the terms or the extent of the employees entitlement.
- any restrictions on the shares.
Non assignability of rights – the terms of the option must:
- prohibit the option holder from transferring any of his or her rights under it; and
- if they permit its exercise after that person’s death by the person’s personal representatives, do not permit this more than 1 year after the date of death.
The scheme can include conditions that ensure should the employee leave the employment any unexercised options they hold will automatically lapse and any shares acquired under option have to be returned at a pre-determined price.
Get in touch
If you need assistance attaining an EMI for your business and would like more information about EMI share option schemes, contact Mark Moore, Tax Partner in London on +44 (0)20 7388 2641 or in St Albans on +44 (0)1727 833222 to see how we can help you.
"*" indicates required fields
Sign up to our newsletter
Join our mailing list to receive regular updates on
the news and events you need to know about.