What is an Enterprise Management Incentive? EMI Share Options Explained

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Enterprise Management Incentive (EMI) options are a type of employee share option which are subject to favourable tax treatment, and specifically targeted at smaller high-risk companies.  The firm has noticed a recent surge in the popularity of EMI options as they are a great way to drive recruitment and to incentivise existing staff.

EMI schemes give the option to purchase shares at price agreed in advance. The options can be converted into shares either immediately, at a point in the future, or upon the sale of the company.

EMI schemes can motivate staff to create value for the company as employees who are granted options will benefit directly if the company is successful.   When the value of the company (and so the shares) increases after having agreed the price, they can exercise their options and sell their shares at a profit.

EMI options can be granted under an EMI option agreement with the employee, to be read in conjunction with a set of scheme rules.

Which companies can grant EMI options?

To be capable of granting options, the company must be an “independent trading company” with:

  • gross assets of no more than £30 million; and
  • fewer than 250 full-time employees.

Who can be granted EMI options?

EMI options can be granted to employees (not directors or consultants) who:

  • do not have a “material interest” in the company and;
  • work for the company for at least 25 hours per week, or 75% of their working time.

Tax treatment

There is no income tax to pay on the grant of an option.  Upon exercise, there is no income tax liability if the exercise price was at least equal to the market value of the shares at grant. If the exercise price is less than the market value of the shares at grant, then income tax is due on the price difference.

On the disposal of option shares, capital gains tax may be payable on the difference between the sale proceeds and the market value of the shares when they were granted.

There are also tax benefits for employers; they do not have to pay National Insurance Contributions on either the grant or exercise of the options and corporation tax relief is available when the options are exercised.

HMRC procedures

Before granting EMI options, the company must obtain clearance from HMRC to ensure that the proposed options meet the requirements for an EMI scheme.  HMRC will need to confirm:

  • that the company is a qualifying company; and
  • the market value of the shares.

HMRC must also be notified once the options have been granted within 92 days, or the options will not qualify as EMI options and the tax reliefs will not apply.

How we can help

The first step will be to get an HMRC approved EMI Valuation [and scheme approval] prepared by an accountant.  Once this is in place we can assist with the following:

  • drafting scheme rules and option agreements;
  • reviewing and, if necessary, amending the company’s articles of association to ensure the EMI share options can be granted;
  • reviewing any shareholders agreement and, if necessary, either amending the agreement or obtaining shareholder consent to grant the options;
  • drafting board minutes and completing the Companies House filings where necessary; and
  • notifying HMRC of the grant of EMI options.

Speak to our Corporate & Commercial Specialists

Please contact Harriet Jones, a partner in the corporate & commercial team if you would like to discuss how EMI options might benefit your company.