The Enterprise Management Incentive (EMI) scheme is a UK government initiative designed to help small to medium-sized businesses attract and retain key employees by offering them share options. This scheme is particularly beneficial for startups and high-growth companies looking to incentivise their employees with a stake in the company’s success.
The company must have gross assets of £30 million or less.
The company must have fewer than 250 full-time equivalent employees.
The company must be independent and carry out a qualifying trade.
Employees must work at least 25 hours per week or, if less, at least 75% of their total working time.
Under the EMI scheme, companies can grant tax-advantaged share options to their employees. These options allow employees to purchase shares in the company at a future date, often at a discounted price.
The conditions on issue are as below:
The maximum value of shares that can be granted to an employee under the EMI scheme is £250,000.
The total market value of unexercised qualifying options must not exceed £3 million at any time.
Options must be granted within 90 days of receiving a valuation from HMRC.
The EMI scheme is a powerful tool for attracting and retaining top talent. By offering share options, companies can incentivise employees to stay with the company long-term, remain committed day-to-day and share in the company’s success.
Some significant benefits of the EMI scheme are the tax advantages it offers:
Employees do not pay Income Tax or National Insurance when the options are granted.
If the options are exercised at the market value at the date of grant, there is no Income Tax or NICs to pay on exercise.
Companies can benefit from Corporation Tax relief on the difference between the market value of the shares and the exercise price.
Employees may be eligible for tax at 10% under Business Asset Disposal Relief (BADR) if the options are held for over two years.
EMI options align the interests of employees with those of the company’s shareholders. Employees become part-owners of the company, which motivates them to contribute to the company’s long-term success, driving growth and profitability.
Setting up an EMI scheme involves several steps:
1. Draft a Share Option Plan: Outline the terms of the option, including the number of shares, the exercise price, and any performance conditions.
2. Obtain HMRC Approval: Submit a valuation to HMRC to agree on the market value of the shares at the time of the grant.
3. Grant Options: Once approved, formally grant the options to eligible employees and provide them with the necessary documentation.
Accurate valuation is crucial for the EMI scheme and determining a fair market value of the shares at the time the options are granted involves the steps below.
It’s important to liaise with the appropriate legal, accounting and tax specialists to ensure that your scheme is compliant and the tax benefits are available to employees upon exercise.
Conduct a thorough financial analysis and perform different means of business valuation.
Consider factors such as recent funding rounds, revenue, and market conditions which may impact valuation.
Submit the valuation to HMRC and await their approval and confirmation.
When granting EMI options, companies need to decide on:
Effective administration and clear communication are essential for managing an EMI scheme:
1. Maintain accurate records of all granted options and their status.
2. Regularly update employees on the value of their options and any relevant company developments.
3. Ensure compliance with ongoing reporting requirements to HMRC.
When employees decide to exercise their options:
In the event of an exit, such as a sale or IPO:
Complying with legal and regulatory requirements is critical:
Disqualifying events can affect the tax advantages of EMI options:
The EMI scheme isa great way for startups and growing businesses to attract and retain key talent, offering tax advantages and aligning the interests of employees and shareholders.
At Sytrus, we specialise in helping businesses implement and manage EMI schemes fit for their business. We can help you navigate the complexities of the scheme, maximise its benefits, and maintain compliance with regulatory requirements.
Reach out through our website and we’d be happy to chat you through how it might work in practice.
HMRC’s official guidelines and resources on the EMI scheme- link HERE.
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