The Enterprise Management Incentive (EMI) scheme is a tax incentised employee reward scheme which uses share options. It is not to be confused with the Enterprise Investment Scheme (EIS) which is a scheme where investors receive tax relief on their investment. 

Subscribers see Enterprise Management Incentive (subscriber guide) for the full version of this note.

At a glance

The Enterprise Management Incentive (EMI) is a tax-advantaged share option scheme designed for smaller companies.

A company may grant options to selected employees to allow them to acquire its shares over a prescribed period and provided that certain qualifying conditions are met:

  • There is no tax charge on the exercise of an EMI option providing it was granted at market value.
  • 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 his shares and proceeds exceed the market value at the date of the grant of the option.
  • Valuations can be agreed with HMRC.

Tax-advantaged status can be lost if the company:

  • Does not set up its EMI within the terms of the legislation.
  • Fails to notify HM Revenue & Customs (HMRC) of the grant of an EMI option within 92 days, or
  • If 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: 

  • 1. Basic example
  • 2. Options offered for free shares
  • 3. Options offered for shares at market value

See Enterprise Management Incentive (subscriber guide)

EMI conditions: 

Qualifying companies

A company can be quoted or unquoted.

It must:

  • Be independent with gross assets of less than £30 million and have fewer than 250 full-time 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: a fixed place of business or an agent concluding contracts on its behalf.              

See Enterprise Management Incentive (subscriber guide)

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. Once the limit is reached, options may not be granted to the individual within 3 years of 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 (measured on grant) cannot exceed £3 million at any time.

See Enterprise Management Incentive (subscriber guide)

Terms

  • The main terms of the option must be specified in an option agreement.
  • When the underlying shares are subject to restrictions this may affect the tax and NICs payable. Restrictions will also affect share valuation.

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.

Valuations

It is possible to agree a valuation of a company with HMRC for EMI purposes. This can be done by submitting form VAL231 to HMRCs Share and Assets Valuation (SAV) team. The valuations are valid for 60 days, though, if there have been no significant events, SAV will agree to extend it by 30 days on request.

Valuation FAQs answered:

  • 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 AMV and UMV?
  • Does the value depend on hope value?

See Enterprise Management Incentive (subscriber guide)

 

Checklists

This is designed to show you the main stages in setting up an EMI scheme or plan.

See EMI: checklist



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