What is an EMI Scheme?
- EMI Share Options Scheme is an initiative HMRC implemented to allow UK businesses to give share options to their employees with significant tax benefits.
- The scheme is intended to help smaller independent businesses realise their potential by attracting and retaining the best employees for long-term success.
- The key difference between EMI and unapproved schemes is that HMRC will approve a valuation and fix a certain strike price. And of course, there are other conditions for businesses and employees to meet.
- The EMI valuation is something that you propose to HMRC via the VAL231 Form. You’ll need to calculate two key numbers for this proposal: the Unrestricted Market Value (what the shares are worth), and the Actual Market Value (what the shares are worth, discounted for restrictions, e.g., the fact that the shares are vesting over time). Remember, you’ll want a low valuation because the profit will then be greater for your employees when the value of the shares increases over time.
The Benefits of an EMI Share Options Scheme
What are the benefits of Share Options for employees?
- Options don’t attract tax until they’re exercised – no Income Tax or National Insurance. This lack of upfront payment generally makes them an appealing way to secure equity in the business they work for.
- The holder is subject to Capital Gains Tax (CGT) on their disposal, but EMI option holders can claim Entrepreneurs’ Relief – reducing the rate to just 10%.
What are the benefits of Share Options for business?
- Financially – enjoy a Corporation Tax (CT) deduction equal to the difference between the market value of the shares at exercise and what your employee pays for them
- Attract Talent – Offering a rewarding option scheme will attract the best talent in the jobs market, which is especially important for start-ups and early-stage businesses battling to grow in competitive industries. Indeed, options are fast becoming a must-have and expected “perk” in the tech start-up world.
- Retain Talent – keeps your employees focused on medium-to-long-term growth and sustainable success. The options must be exercisable within 10 years, and most businesses allow exercise far sooner. Making it exercisable after a time delay keeps staff within a company and motivates them in the long run as they would like to increase their shares worth by working harder for the company.
- Rewarding Employees – EMI options can be offered as a reward for meeting certain individual or company targets. This provides an incentive for staff to go the extra mile.
EMI Options Scheme:
John is offered the same equity for the same value within a different EMI-qualified business, and he also acquires his shares worth £10,000. However, exercising his options incurs no tax bills whatsoever, and when he later sells his shares for £125,000, he is entitled to Entrepreneurs’ Relief; the reduced rate of 10% on Capital Gains Tax. This means that John will now pay CGT on the £115,000 value increase between what he paid for the shares and what she sold them for 10% = £11,500.
So, John will pay £11,500 total tax (when he has the cash), while Sarah pays £41,000. The EMI Share Options Scheme would therefore save more than 112% for the employee in this circumstance. This shows why EMI is so popular, and why it is a must-do for growing start-ups and small businesses.
Important note: As we mentioned earlier, John would also benefit from an HMRC valuation which is as low as possible. This allows her to get the options at a lower strike price, thus maximising his profit when the company shares are eventually sold.
Eligibility conditions for EMI
- The business must be actively trading and have a permanent establishment in the UK
- The business must have fewer than 250 employees when the EMI options are granted
- The business’s total assets must not be worth more than £30 million
- The business must have allocated less than £3 million in EMI shares
- The business mustn’t be a subsidiary or be externally controlled
- The business must notify HMRC within 92 days of granting the options
- The person must be a legal employee of the business
- The person must use a minimum of 25 hours per week or 75% of their time as an employee or director of the company
- The person cannot hold more than 30% of all company shares
- The market value of the options mustn’t exceed £250,000 per employee
- The options must be granted within 90 days of HMRC’s valuation
- The options must be able to be exercised within 10 years of being granted
- The options must be non-transferrable
All terms and conditions for your options scheme must be placed in writing. Aside from the HMRC rules, all other terms are flexible and can be designed by your company. These include vesting periods – i.e. when the options can be exercised (events, achievements, or timescales within 10 years).
If you need assistance in applying for the EMI share scheme, please contact us at 02082271700 or firstname.lastname@example.org