Enterprise Management Incentives (EMI) are a type of share options scheme for businesses which is approved by the government. A share option scheme essentially gives employees the option to acquire shares in the company and EMI’s are a particularly attractive version as it offers tax advantages to recipients. 

EMI schemes have proven to be very beneficial for some early-stage businesses, however, there are certain rules that you need to be aware of before committing to distributions to your employees. Keep reading to learn more. 

What Is An EMI Scheme?

An EMI scheme gives employees options with the right to purchase shares in the company for a particular price. Only select employees are usually offered this right and the agreement between the employee and the employer can be tailored to meet the unique circumstances. 

However, before a business can create an EMI scheme, they need to ensure they have certain requirements covered. These include: 

  • The company’s assets must be valued at no more than £30 million 
  • There needs to be less than 250 full time staff 
  • Employees can be offered a maximum of £250,000 of share value 
  • The agreement must be within a 3 year period 
  • It is not part of an industry that falls under ‘excluded activities’ such as property development, legal services, banking and farming 

How Does An EMI Scheme Work?

An EMI scheme rewards employees with the right to buy shares in the company for a certain price. The scheme is usually governed by an Options Agreement that requires the employee to fulfil requirements like meeting certain work standards or completing a particular period of time before their options vest. 

Why Offer Share Options To Employees?

There are a number of reasons for employers to offer share options to their employees. 

Firstly, for smaller companies that are just starting out and do not have the resources to properly compensate their staff with cash but still wish to utilise their skills, making them part of an EMI scheme can be a great way to spark their interest in working for you. 

This way, if the employee is working for less money, they are otherwise compensated and can benefit as the company grows in the future. 

EMIs can also inspire loyalty and incentivise increased productivity in employees as they benefit directly from the company’s growth rather than simply receiving a paycheck. It can make employees feel more involved in the company’s progress and credited for the true value of their work. 

So, an EMI scheme can also help strengthen the culture of small but ambitious growth venture substantially. 

How To Set Up An EMI Scheme

If you’re setting up an EMI, HMRC will need to be informed twice. The first step involves telling HMRC about your EMI scheme in order to get approval of the option strike price as it relates to your valuation.  

Once this has been completed, an EMI grant notification will need to be submitted within 92 days of the options being granted to the relevant recipients. 

When selecting employees for the scheme, it’s important to ensure they work at least 25 hours a week for the company and do not own more than 30% in shares already. 

The general process to set up an EMI scheme will look somewhat like this: 

  • Ensure the business is eligible for the scheme
  • Notify and file a valuation with the HMRC 
  • Get the relevant directors and shareholder approvals for the equity allocation
  • Create the scheme and put in place the required paperwork
  • Submit a grant notification after issuance

Is My Business Able To Set Up An EMI Scheme?

Prior to setting up an EMI scheme, it’s a good idea to take a look at the Company Articles. The Articles can provide information on how shares can be bought, sold and distributed. Alternatively, your Shareholders Agreement can also provide much needed details around a shareholder’s rights with respect to company shares and the allocation of shares for an options program.

It’s important that internal company documents permit the setup of an EMI scheme in order to avoid potential conflicts down the road. 

How Are EMIs Taxed?

EMIs are popular for their tax benefits. As long as they were sold at market value, EMI options are generally not taxed. However if an employee wishes to sell their shares once they have been exercised, then Capital Gains Tax is likely to apply. 

For employers, corporation tax relief can also apply for the difference between the amount for when the shares were granted and their vesting date. 

What Are The Advantages And Disadvantages Of An EMI?

We largely covered the benefits of EMIs in this article. Tax benefits, employee incentive and retention as well as better growth for the business are all reasons to look into getting an EMI scheme. However, there are disadvantages to having an EMI scheme as well.  

For employees, EMIs can carry some uncertainty as they can be impacted by events out of their control. For example, if the company company stops trading before their options vest. 

Furthermore, if the shares can only be accessed after a certain amount of time, the employee cannot change their place of employment for that period, limiting their options. When getting employees to agree to an EMI scheme, it’s important to address these scenarios.  

Is An EMI Scheme Right For My Business?

Deciding whether an EMI scheme is right for your business means looking at the individual and unique circumstances that surround your business and assessing whether or not it’s the right step. 

If your company is hoping to grow and keep employees for a long period of time, then an EMI scheme is a worthy investment. It’s an effective solution for keeping your staff by providing tax benefits and other incentives. 

However, there is also the risk of employees feeling a level of uncertainty or limitations under an EMI scheme. It’s worth balancing these benefits to better understand whether an EMI is suitable for your company. 

If you need help, we recommend talking to a legal professional to help sort through your options. 

Key Takeaways

EMI schemes are an effective way to retain valuable employees, and is a worthy investment for your company’s long-term growth. If your company is looking to offer an EMI scheme to employees, it’s important to understand the rules around EMIs and how they work.

If you would like a consultation on people with significant control, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.

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