What is the Enterprise Management Incentive (EMI) scheme? What are the qualifying conditions? How do you set up an EMI share option scheme?
Subscribers see Enterprise Management Incentive (subscriber guide) for the full version of this note.
This is a freeview 'At a glance' guide to the Enterprise Management Incentive (EMI) scheme.
At a glance
The Enterprise Management Incentive (EMI) is a tax-advantaged employee share option scheme designed for small and medium-sized companies.
EMI is not to be confused with the Enterprise Investment Scheme (EIS) which is a different scheme offering tax breaks to business investors.
Under EMI a company is able to select employees and give them the option of acquiring shares over a prescribed period, subject to qualifying conditions being met.
The impact on the employee receiving an EMI option is:
- There is no tax charge on the exercise of an EMI option providing it was granted at market value, exercised within 10 years of grant and no ‘disqualifying event’ has occurred.
- If the company’s share price has increased in value between the time of grant and exercise the uplift is not charged to Income Tax.
- There will be a Capital Gains Tax (CGT) charge when the employee disposes of their shares and proceeds exceed the market value at the date of the grant of the option.
- Valuations can be agreed upon with HMRC and advance assurance can be sought from them that the company seeking to grant EMI options meets the qualifying conditions.
Tax-advantaged status can be lost if:
- The company does not set up its EMI within the terms of the legislation.
- The company fails to notify HMRC of the grant of an EMI option within the specified time.
- A disqualifying event occurs and option holders fail to exercise their options within 90 days.
The directors need to be aware of the type of events that may disqualify a scheme as they will be able to avoid them if they know what to watch out for.
An EMI share option scheme works as follows:
- Options offered for free shares.
- Options offered for shares at market value.
A company can be quoted or unquoted.
- Be independent with gross assets of less than £30 million and have fewer than 250 full-time equivalent employees.
- Satisfy the qualifying trade test.
- Excluded activities for EMI are the same as for EIS, see EIS: qualifying trades.
- There are special conditions for qualifying subsidiaries.
- Have a Permanent Establishment in the UK: generally a fixed place of business or an agent concluding contracts on its behalf.
Employees and qualifying shares
- Employees who satisfy the qualifying conditions are given options to acquire qualifying shares.
- Options must be granted for commercial reasons in order to recruit or retain an employee and not as part of a tax avoidance arrangement.
- The total market value of shares subject to an unexercised EMI option at any time cannot exceed £250,000 per employee. Once the limit is reached, options may not be granted to the individual within three years of the grant of the last option.
- Any number of employees may hold EMI options but the total market value of all shares subject to unexercised EMI options granted by the company or group, determined at the date of grant, cannot exceed £3 million at any time.
- The main terms of the option must be specified in a written option agreement.
- When the underlying shares are subject to restrictions this may affect the tax and NICs payable. Restrictions will also affect share valuations.
Tax and NIC treatment of an EMI option
See Enterprise Management Incentive (subscriber guide) for further details and examples
Corporate tax deduction
The company will receive a Corporation Tax deduction on the exercise of options granted under an EMI plan, provided that certain conditions are met. See Enterprise Management Incentive (subscriber guide)
The relief is given for the accounting period in which the EMI option is exercised on the difference between the market value of the option shares on the date of exercise and the exercise price.
It is possible to agree a valuation of a company with HMRC for EMI purposes. This can be done by submitting form VAL231 to HMRC's Share and Assets Valuation (SAV) team. The valuations are valid for 90 days and the relevant EMI options should be granted by the end of this period.
HMRC acknowledges that due to COVID-19 there may be a delay in granting EMI options which takes people over the 90-day period. They have confirmed that any new EMI valuation agreement letter issued between 1 March 2020 and 1 December 2022 will be valid for 120 days.
Valuation FAQs answered:
- EMI what's new?
- How are EMI shares valued?
- Do any discounts apply?
- What are 'significant events'?
- What do you need to send with the valuation?
- How does HMRC calculate Actual Market Value (AMV) and Unrestricted Market Value (UMV)?
- Does the value depend on hope value?
This is designed to show you the main stages in setting up an EMI scheme or plan.
See EMI: checklist