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EMI scheme solicitors
An enterprise management incentives option (EMI option) is a type of employee share option that enjoys favourable tax treatment. They are specifically targeted at small trading companies.
EMI options may be granted under a set of plan rules, or by way of stand-alone EMI option agreements. The EMI code requires that the EMI option terms take the form of a written agreement between the option holder and the grantor which states the main terms of the option, including how and when it may be exercised.
Which companies can grant EMI options?
To qualify to grant EMI options, a company must be an independent trading company with:
- Gross assets of no more than £30 million.
- Fewer than the equivalent of 250 full-time employees.
Certain trading activities will not qualify and there are detailed rules relating to the independence requirement, the trading requirement and the shares that can be used for the options.
What shares can EMI options be granted over?
EMI options can be satisfied by newly issued shares or by the transfer of existing shares from a shareholder, including an employee benefit trust.
The shares must meet certain requirements, including that the shares must be fully paid up, ordinary shares.
Who can be granted EMI options?
To be eligible to be granted an option, an employee must work for the company for at least 25 hours per week, or if less, 75% of their working time.
Employees cannot be granted options if they (or their “associates”) have a “material interest” in the company whose shares are used for the scheme, or in certain related companies.
Options can only be granted to employees. They cannot be granted to non-executive directors or consultants.
Setting the exercise price and valuing the shares
The exercise price of an EMI option can be set at any level (and can be nil, if option shares are not newly issued). Setting an exercise price that is less than market value at grant has consequences for the tax treatment of the EMI option on exercise.
When can an EMI option be exercised?
The EMI code requires that EMI options must be capable of being exercised within ten years of the date of grant, and options can only be exercised within a period of 12 months after the option holder’s death. Otherwise, there are no restrictions on the exercise provisions that can apply to EMI options, and this flexibility means that they can be used for exit-only arrangements (where an option can only be exercised on an exit event, such as a share sale or listing), as well as for options exercisable at the end of a performance or vesting period.
Tax treatment for the company
A corporation tax deduction may be available when EMI options are exercised.
Relief is given in the accounting year in which the options are exercised and should be claimed by the option holder’s employer company.
Issues can arise on a change of control where the acquiring company is AIM listed or is a private company if options are not exercised within 90 days of the change of control.
Tax treatment for the employee
The EMI option plan must be registered with HMRC who will allocate a unique scheme reference number.
In order for an EMI option to qualify for favourable tax treatment, the grant of the option must be notified to HMRC within 92 days of the grant date, using the ERS Online Service.
If the option remains a qualifying option (no disqualifying event has taken place before exercise), the tax treatment for an employee holding an EMI option is as follows.
There is no income tax liability on the grant of the option.
There is no income tax liability on exercise if the exercise price was at least equal to the market value of the shares at grant.
If the exercise price was less than the market value of the shares at grant, then income tax is due on the difference between the exercise price and the market value at grant.
On a sale of the option shares, capital gains tax (CGT) may be payable on any gain over the market value at grant (that is, the difference between the sales proceeds and the market value of the shares at grant).
Shares acquired on the exercise of EMI options qualify for entrepreneurs’ relief, provided statutory conditions are met, with the holding period of the option counting towards the 12 month holding period for the shares required for the relief to apply.
National insurance contributions
Broadly, the NICs treatment of EMI options follows the income tax treatment:
- There will be no NICs if no income tax is due.
- There will be NICs if income tax is payable and the shares are readily convertible assets for tax purposes. This would include employer’s NICs, although it is possible to structure the option so that any employer’s NICs costs are passed to the employee.
For any questions you may have concerning an EMI option scheme contact our solicitor Suzy Giele.