EMI Disqualifying Events You Need to Know

The Enterprise Management Incentive (EMI) scheme is a share option plan available in the UK used mainly by small to mid-sized companies to attract, retain and incentivise talent, while offering tax benefits to both employees and employers.

There are a number of conditions that companies and their employees must satisfy in order to receive the maximum EMI tax benefits. But what about those companies who don’t meet all the conditions? Here, we’ll discuss the conditions resulting in a disqualifying event and what happens next.

EMI disqualifying events

When your business or an employee doesn’t satisfy the specific conditions required to participate in an EMI scheme, an EMI disqualifying event occurs and restricts the tax relief.

EMI requirements for companies:

1. Have a permanent establishment in the UK
2. Is not majority-owned by another entity
3. Only have ‘qualifying subsidiaries’
4. Have fewer than 250 full-time employees
5. Have gross assets of £30 million or less
6. Is not in any of the ‘excluded activities’ including banking, insurance, farming, property, legal services, hotels and care homes, and shipbuilding

EMI requirements for employees:

1. Individuals must be employees of the company or one of its qualifying subsidiaries when the EMI option is granted
2. Work at least 25 hours each week or 75% of their working time for the company
3. Must not have a material interest of more than 30% of the ordinary share capital of the company before the options are granted

EMI requirements for EMI Options:

1. To be offered up to a maximum of £250,000 worth of shares to each individual
2. Must be exercised within 10 years of grant
3. Must be registered with HMRC by 6 July following the end of the tax year in which the EMI options were granted

More information about the qualifying conditions can be found here.

HMRC also highlights a number of disqualifying events which include:

• The company comes under the control of another company
• The company comes under the control of another company
• Changes to the terms of the EMI option
• Alteration to the share capital of the company
• A conversion of shares from one type to another

What happens if there’s an EMI-disqualifying event?

If this occurs, whether it relates to an employee or the company itself, the EMI income tax and National Insurance Contributions (NICs – the UK term for social taxes/social security) reliefs for employees will be limited. The corporation tax deduction (available if qualifying shares are acquired by employees upon the exercise of an EMI option) will also be restricted.

If EMI options are exercised within 90 days of a disqualifying event:

All favourable tax treatment at grant, exercise and sale can be retained for the option holders (i.e. the tax benefits are not lost). This means no income tax and NICs (if the shares are readily convertible assets) are charged at the time of grant and exercise, provided that the shares are purchased for at least the market value at grant.

At sale of the shares, the gains can be charged at a favourable Business Asset Disposal Relief (BADR) rate of 10% if the sale occurs at least 2 years from the date of grant and the seller still works for the granting company at the time of sale (amongst other conditions).

If the exercise of EMI options takes place more than 90 days following a disqualifying event:

The favourable tax treatment is lost. At exercise, income tax and potentially NICs (if the shares are readily convertible assets), are charged on the amount by which the market value of the shares at the date of exercise exceeds the market value of the shares immediately before the disqualifying event occurred.

At sale, the discounted rate of BADR is not available and instead the ordinary rate of Capital Gains Tax (20% for higher or additional income tax rate payers) applies.

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The onus is on the participating company to continually analyse their scheme, inform HMRC of any changes, communicate internally and therefore minimise the risks of participants not receiving the rewards they had been promised.

Where a disqualifying event occurs or is considered likely to occur, companies should obtain tax advice on the consequences including understanding when the 90 day window begins in which the EMI options can be exercised with the tax benefits retained.

Enterprise Management Incentives Schemes, Simplified

At J.P. Morgan Workplace Solutions, we have all the necessary skills and know-how to help you deal with your EMI scheme at every step along the way, from setting it up to launching and then managing the scheme throughout its lifetime, and also, crucially, to assist you in handling potential disqualifying events as and when they emerge.

Take advantage of our experts and use our enterprise incentive management software to get the most out of the EMI scheme.

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