Enterprise Management Incentives (EMIs)
If the company that you work with has assets of £30 million or less, then it may be able to offer Enterprise Management Incentives (EMIs).
You can purchase shares of up to £250,000 without paying any Income Tax or National Insurance on the difference between what you pay for the shares and what they are worth.
You may have to pay Capital Gains Tax if you sell the shares.
Excluded Activities
Companies that work in ‘excluded activities’ aren’t allowed to offer EMIs. Excluded activities include:
Benefits of an EMI scheme
Studies show that companies offering the EMI scheme outperform those that do not. EMI schemes are very popular with private companies. Here are some of the reasons why:
EMI Scheme is Discretionary
The EMI scheme is discretionary. This means that employers are not required to offer EMI options on equal terms to every employee or director. This makes EMI schemes very flexible.
EMI Scheme is Tax Efficient
EMI options are tax efficient. Employers can claim corporation tax relief. Subject to limited exceptions, the effective tax rate for employees is 10% if they hold EMI options for one year.
Companies Planning to Exit
EMI schemes can be designed to fit most exit objectives. Many of the EMI schemes we implement are exit only – that means it is only when the company is about to be sold do the employees exercise their EMI options and become shareholders. The employees then go onto immediately sell their shares along with other shareholders on sale. There are established ways to ensure that no employee can hold up the sale.
EMI Options Can Supplement Salary
There is a skills shortage, yet the pressure to limit expenses remains intense. An EMI scheme enables employers to supplement pay with share benefits. Employers who do not offer options alongside pay and bonuses often discover their staff joining competitors.
EMI Options Can Be Free For Employees
EMI options can be awarded at “nil cost”. Nil-cost means employees pay nothing to exercise and acquire shares..
EMI Schemes Are Investor-Friendly
Professional investors understand EMI options as they are well established. Often investors expect senior management teams to be motivated with EMI options. Usually, investors agree to dilute their investments to free up shares for employees.
Employees Lose Nothing With EMI Scheme
An EMI scheme can run in tandem with the SEIS/EIS schemes. Apart from the fact that EMI is designed to reward employers and SEIS/EIS designed to reward investors the qualifying trading conditions are fairly similar.
EMI Options and the SEIS or EIS Scheme
An EMI scheme can run in tandem with the SEIS/EIS schemes. Apart from the fact that EMI is designed to reward employers and SEIS/EIS designed to reward investors the qualifying trading conditions are fairly similar.
Requirements Employers Need to Satisfy
In order for your employees to benefit from EMI tax relief under the EMI scheme both the company granting the options and the employee receiving an option must qualify.
It is possible to implement an EMI scheme over parent shares for the benefit of employees of all or any subsidiary.
Overall Limit on Awards Under an EMI Scheme
Any “qualifying” company can grant EMI options under the EMI scheme for shares valued up to £3 million. The calculation is performed at the date of grant of an EMI option and is not re-calculated during the life of the EMI option.
Corporate Structure Requirement For EMI Schemes
The company must not be under the control of another company. Any subsidiaries must be 51% controlled.
Only companies employing fewer than 250 full time equivalents can offer EMI options. Part-time employees count proportionately.
The company must trade wholly or mainly in the UK.
Gross assets must be less than £30 million.
Dilution
HMRC do not place any limit on dilution providing that the limit on value is not exceeded. However, dilution is an important area to review from a shareholder protection aspect.
Trading Status
The company can be quoted or unquoted.
Qualifying Trades For EMI Schemes
Some trades do not qualify for EMI tax relief, including:
A combination of trading and non-trading activities may not preclude eligibility. It is a matter of fact and degree which we can deal with for you based on past experience.
EMI Options and Partnerships
Partnerships are not companies so they do not qualify for EMI options under the EMI option scheme. In place of shares, there are ways to incentivise partners of LLPs and partnerships.
Adoption of EMI Schemes by International Groups
International groups with UK subsidiaries can implement an EMI scheme over the parent company shares or stock for UK employees.
But, it is important to check that the group will qualify under the EMI legislation. We do sometimes find that there are disqualifying factors for international groups such as the UK work force being too large. We will check the position for you.
Who Can Receive EMI Options?
Any employee, whether full time or part time or a director, will qualify under the EMI legislation. Consultants, many non-executive directors and employees with several jobs may not qualify. If an individual does not qualify for EMI there are alternatives you can consider which we can discuss.
Taxation Under the EMI Scheme
EMI share options under an EMI option scheme are tax efficient for employees and employers.
For Employers
Corporation tax savings can be substantial if the shares under EMI option gain value. Companies providing employees with EMI options can also deduct the set-up and administration costs from their taxable profits.
For Employees
EMI options granted under EMI schemes are very tax attractive for employees because the benefits far out strip the tax position for unapproved options. This is one of reasons why EMI options are so popular.
Entrepreneurs’ Relief Under EMI Schemes
Entrepreneurs’ relief applies when the employee holds shares acquired under an EMI scheme, if they held the qualifying EMI options for over 1 year. The size of the shareholding under the EMI option does not matter, neither does the fact that the employee did not hold actual shares for a year.
Entrepreneurs’ Relief of EMI Option Shares vs. Ordinary Shares
EMI option holders are in a better position than ordinary shareholders who did not acquire shares though an EMI scheme:
Ordinary shareholder must hold over 5% of the ordinary voting share capital for over 1 year.
EMI option holders who sell shares are eligible for:
Valuing Shares For Tax Purposes Used in the EMI Scheme
Putting shares under an EMI option scheme requires a share valuation of shares under the EMI option. The valuation affects the tax position so it is an integral part of an EMI option under the EMI option scheme.
EMI Scheme Recent Work
Recently we set up the following EMI schemes:
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UK Partnership Registration No: OC357965.
VAT no: 114 7388 13.
Website Designed & Developed by braden-threadgold.com