Enterprise management Incentive (EMI) schemes are a tax-efficient share option plan, available in the UK, used to reward and incentivise employees. Mainly adopted by small to mid-sized companies, there are currently over 16,400 active plans in place across the region.
These schemes come with very generous tax benefits but are a number of requirements, or called qualifying conditions, that must be met by both the business and employees before a plan can be put in place. If these criteria can’t be met, the EMI reliefs may be restricted.
If EMI qualifying conditions are satisfied what tax benefits can you qualify for?
For the employer:
An employer can enjoy corporation tax relief if qualifying shares are acquired by employees upon the exercise of an EMI option.
In this instances the corporation tax deduction matches the difference between the market value when the shares are acquired and the final amount that the employee pays for them.
For the employees:
At exercise, no income tax and National Insurance Contributions (NICs – the UK term for social taxes/social security) are charged under a qualifying event where the shares are purchased at a price at least equal to the market value on the day the option is granted.
At sale, the disposal of shares from an EMI may qualify for Business Assets Disposal Relief (BADR) provided that there are at least 2 years from the date of grant. When BADR is available, CGT is charged at a rate of 10%, but only on the gain.
EMI qualifying conditions for Companies
1. Have a permanent establishment in the UK
The company must carry on a qualifying trade (i.e. not an excluded trading activity, see point 2) in a commercial, profit-making basis. Companies must also be able to demonstrate that they are established in the UK by having either:
– a fixed place of business, e.g. an office and a factory; or
– an agent acting on their behalf to enter into contracts
2. Is not in any of the ‘excluded trading activities’
Companies must not be substantially involved in any of the excluded industries, which include:
– banking, insurance, money-lending
– legal or accounting services
– property development
– leasing
– shipbuilding, coal and steel production
– operating or managing hotels
– operating or managing nursing homes
– farming
– forestry activities
3. Not majority-owned by another entity
Companies must qualify as an independent operation, meaning more than 50% of the ordinary share capital must not be owned by another company or controlled by another company, or by another company and any persons connected with it.
4. Only have ‘qualifying subsidiaries’
A company that has one or more subsidiaries does not qualify for an EMI unless each subsidiary is themselves a qualifying subsidiary.
A qualifying subsidiary means the company whose shares are subject to EMI options holds, directly or indirectly, more than 50% of the ordinary share capital of the subsidiary. No other person must be able to control the subsidiary.
5. Have fewer than 250 full-time employees
A full-time employee refers to a person who works at least 35 hours each working week. This requirement on the number of employees applies at the time when a qualifying EMI option is granted. It also applies to employees of the company and all its qualifying subsidiaries (if any), whether or not the employees are based in the UK.
The following employee groups can be excluded from the definition of full-time employees at the time an option is granted:
– Students on vocational training
– Apprentices
– Employees on maternity or paternity leave
For part-time employees their full-time equivalence should be considered. For example, a person working 17.5 hours each working week would be expected to count as 50% of a full-time employee.
6. Have gross assets of £30 million or less
This asset requirement applies as of the date the option is granted. The gross assets of the group as a whole are expected to be considered if the company is a member of a group of companies.
“Exceeding these limits [no. of employees (point 5) and gross assets (point 6)] will not cause the tax advantages for existing EMI options to be lost, but it will prevent a company from granting any new EMI options while they remain above these levels,”
– says Kerrie Willis, Director at RSM UK, in the ‘’Too big for EMI’’ interview with us.
EMI qualifying conditions of Employees:
1. Be an employee
Individuals must be an employee of the company or of one of its qualifying subsidiaries when the EMI option is granted.
2. Work at least 25 hours each week
The working hour requirement is based on the average working time of an employee, so those on flexible hours should also be considered. If this 25-hour requirement can’t be met, those who devote 75% of their total weekly working time to the business are considered eligible too.
3. Have a material interest of up to 30% of the ordinary share capital
Employees, either individually or together with an associate, must not have a beneficial ownership of more than 30% of the ordinary share capital of the company before the options are granted.
If the material interest is greater than 30% after the option grant, the options held will not be affected.
EMI qualifying conditions of EMI Options:
1. To be offered up to a maximum of £250,000 worth of shares to each individual
The calculation of £250,000 is based on the time the option was granted. If granted in excess of £250,000, the excess will not be a qualifying option and will lose the associated tax advantages.
2. Must be exercised within 10 years of grant
If an EMI option is exercised within 10 years of the date of grant and there has been no disqualifying event, then no income tax or NICs are due, provided that the employee buys the shares for at least the market value at the time of the option grant.
3. Must be registered with HMRC
The company must be registered with HMRC by 6 July following the end of the tax year in which the EMI options were granted (previously HMRC had to be notified within 92 days of the date of grant) and any grants included in an annual return submission to HMRC.
If the business introducing the EMI fails to meet these deadlines, they risk losing any tax benefits for themselves and the employees. This could lead to negative feeling and discontent so it’s important that employers are aware of all deadlines.
What happens if the qualifying conditions can’t be met?
If either the business or the employees fail to satisfy any of these conditions the EMI tax and NICs relief will be limited. For example, income tax and NICs may be charged and the favourable BADR’s CGT rate at sale may not be available. Read more here.
The onus is on the participating company to continually analyse their scheme, inform HMRC of any changes, communicate internally and therefore minimise the risks to participants of not receiving the rewards they had been promised.
Enterprise Management Incentives Schemes, Simplified
At J.P. Morgan Workplace Solutions we have gone down this road with clients many times and thus can provide you with all that you need to know about how to set up an EMI scheme for the first time.
Discover how our equity professionals and software solution can help you with EMI administration.
(Free for up to 100 stakeholders)
Please Note: This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
