EMI scheme – Sytrus

EMI explained: The Benefits of the EMI SCHEME for startups

What is the EMI Scheme?

Overview and Eligibility Criteria

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.

Eligibility Criteria:

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.

How it Works and Conditions

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.

Benefits of the EMI Scheme

Attract and Retain Talent

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.

Tax Advantages for Employers and Employees

One of the significant benefits of the EMI scheme is the tax advantages it offers:

For Employees: No Income Tax or National Insurance is payable when the options are granted or exercised, provided the exercise price is at least equal to the market value at the date that the EMI option was issued. The options may be eligible for tax at 10% under the Business Asset Disposal Relief (BADR) legislation if held for over two years.
For Employers: Companies can benefit from Corporation Tax relief on the difference between the market value of the shares and the exercise price.

Align Long Term Interests

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.

Implementing the EMI Scheme

Setting Up an EMI Scheme

Setting up an EMI scheme involves several steps:

Draft a Share Option Plan: Outline the terms of the option, including the number of shares, the exercise price, and any performance conditions.
Obtain HMRC Approval: Submit a valuation to HMRC to agree on the market value of the shares at the time of the grant.
Grant Options: Once approved, formally grant the options to eligible employees and provide them with the necessary documentation.

Valuing Your Company for EMI

Accurate valuation is crucial for the EMI scheme. Companies must determine the fair market value of their shares at the time the options are granted. This involves:

Conducting a thorough financial analysis.
Considering factors such as recent funding rounds, revenue, and market conditions.
Submitting the valuation to HMRC for approval.

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.

When granting EMI options, companies need to decide on:

Exercise Price: Typically, the current market value of the shares.
Vesting Period: The time period over which the employee earns the right to exercise their options.

Performance Conditions: Any specific targets or milestones that must be met for options to vest.

Managing the EMI Scheme

Ongoing Administration and Communication

Effective administration and clear communication are essential for managing an EMI scheme:

Maintain accurate records of all granted options and their status.
Regularly update employees on the value of their options and any relevant company developments.
Ensure compliance with ongoing reporting requirements to HMRC.

Exercising Options and Implications

When employees decide to exercise their options:

They purchase shares at the pre-agreed exercise price.
The company must ensure that all legal and tax obligations are met.
Consider the impact on employee shareholding and any potential dilution of existing shareholders.

Exit Strategies and Options

In the event of an exit, such as a sale or IPO:

EMI options may become exercisable, allowing employees to benefit from the company’s increased value.
Companies must plan for how options will be handled, ensuring a smooth transition and clear communication with employees.
If the company becomes a 51% subsidiary of another company, the options must be exercised within 90 days in order for employees to realise the benefits of the scheme.

Common Challenges and Solutions

Navigating Legal and Regulatory Requirements

Complying with legal and regulatory requirements is critical:

Stay informed about changes in legislation that may affect EMI schemes, particularly where it , e.g., the 10% BADR tax.
Work with legal and financial advisors to ensure ongoing compliance and address any potential issues promptly.

Handling Disqualifying Events

Disqualifying events can affect the tax advantages of EMI options:

Understand what constitutes a disqualifying event, such as changes in company ownership or the employee’s working hours.
Take proactive steps to mitigate risks and communicate any changes to employees.

Conclusion

Key Points To Remember and How Sytrus Can Help

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.

Additional Resources

Link to HMRC’s official guidelines and resources on the EMI scheme- HERE.