What companies qualify?
  • The gross assets of the company (or the group of companies if a parent company) must not exceed £30 million. Gross assets broadly comprise all assets shown in the balance sheet (note that fixed assets will be included net of depreciation i.e. net book value).
  • The company must have fewer than 250 employees.
  • The company must be independent and not under the control of any other company. Shares in a subsidiary cannot be used in an EMI option, i.e. the shares must be in the parent company.
  • Companies may be quoted or unquoted.
  • There is no requirement that the company be resident or incorporated in the UK but the company must have a ‘permanent establishment’ in the UK. Group companies can offer EMI share option schemes to employees throughout the group, provided that all of the subsidiaries in the group are qualifying subsidiaries. Broadly, this means that the parent (or another subsidiary) must own at least 51 per cent of the share capital and fully control that subsidiary.
  • Certain trades are excluded from the EMI. For a group, the activities of all group companies will be treated as a single business. Here are the excluded types of business:
    • dealing in land, commodities or futures, or shares, securities or other financial instruments
    • dealing in goods, otherwise than in the course of an ordinary trade of wholesale or retail distribution
    • banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities
    • leasing (including letting ships on charter, or other assets on hire)
    • receiving royalties or other licence fees
    • providing legal or accountancy services
    • property development
    • farming or market gardening
    • holding, managing or occupying woodlands, any other forestry activities or timber production
    • shipbuilding, coal and steel production
    • operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment
    • operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home
What employees qualify?
  • They must be a contracted employee and work for the company (or, if relevant, a subsidiary) for at least 25 hours a week or for at least 75 per cent of their paid working time (which includes time spent in self-employed work).
  • They can't have a “material interest” in the company i.e. more than 30 per cent of that company (this is before including any EMI option shares).
Are there any restrictions on the grant of options or type of shares?
  • Each employee can only hold a maximum of unexercised options worth £250,000 in any 3-year period under the EMI. Any further options granted to an employee over and above this sum would not qualify for EMI tax relief.
  • Companies are free to set their own option period, but options must be capable of exercise within 10 years of being granted and be exercised within that period, or the tax benefits of EMI will no longer apply to the exercise of any outstanding options.
  • Companies are free to set the option price per share, which may be more or less than the market value of the shares on the date the option is granted. The shares over which options are granted must be fully paid up ordinary shares. They can be a separate class of ordinary shares e.g. non-voting B shares. It is not possible to grant an EMI option over redeemable or convertible shares.
How is the EMI implemented by the company?

Once the structure of your EMI is finalised, and we have drafted the legal documentation, a separate option agreement is signed for each employee. This enables the company to tailor each grant of an option to the particular employee. However the main body of the agreement, i.e. most of the terms and conditions, will be uniform across all option holders. We draft the board minutes you need to set the scheme up officially. We also supply a template of an option offer letter for the company to give to the employees, together with a straightforward guide to the scheme to help the option holders understand the scheme and how they may benefit in tax terms.

What are the big advantages of EMI options?
  • No income tax or national insurance is payable when EMI options are granted.
  • When shares obtained on exercise are eventually sold the employee will be liable for capital gains tax (CGT), currently at the entrepreneur’s relief rate of only 10%. The employee can also use their annual CGT exemption.
  • The costs of setting up and administering the EMI will be deductible expenses for the company against corporation tax. Also, after exit, the net market value of the options exercised by employees may be an allowable expense, similar to expensing normal employee remuneration.

If the option’s exercise price is set at the same or a higher price than the agreed market value of shares on the date that the option is granted, then no income tax or NI is payable when the option is exercised. Companies may set the option price at a discount to the agreed market value (or even at nil). However, where this is the case then, on exercise of the option, income tax will be payable on the discount (the excess of the market value of the shares on the date the option is granted over the exercise price paid by the employee).

What information do you require?

We send you a short questionnaire to complete, with everything explained very clearly. The sort of information we will need includes –

  • The names of employees to be included in your scheme
  • The number of share options to be granted to each individual (we can help with advice on this)
  • The period over which the options will vest and the structure for the vesting (we will discuss all this with you)
  • When an employee can exercise options and buy actual shares (e.g. any time after vesting, or only on a sale of the company)
  • The price of the options, and the basis for that price (valuation)
  • Your Articles and any shareholders' agreements and the last three years' accounts (or a shorter period if you are an early stage business or start-up)
Does HMRC supervise the operation of the EMI?
  • There is no need for prior approval of EMI share option schemes from HMRC – the company must simply notify HMRC within 92 days once an option has been granted. A company can however seek advance informal assurance from HMRC that it is a qualifying company (however this is rarely needed).
  • A valuation of shares in connection with the EMI will need to be agreed with HMRC. This is important – it means that the market value of the shares is agreed by HMRC as at the date of the granting of the options and avoids any arguments later on when the employee eventually sells the shares on an exit.
  • Companies who grant EMI options will need to make an annual return to HMRC by 7 July each year.
What other requirements are there?

The employee must be prohibited under the terms of the grant of the option from transferring any of his rights under the option to anyone else. If the option is capable of being exercised after the employee’s death, it must not be capable of being exercised more than one year after. There are provisions in the legislation for dealing with the EMI options if the company that granted them is the target of a successful take-over. In certain circumstances the holder of the option can agree with the acquiring company to surrender his option in return for a replacement option to acquire shares in the acquiring company.

Can the tax advantages be lost?

If at any time prior to the exercise of an option a “disqualifying event” occurs then, on a subsequent exercise of the option, an employee will be subject to income tax in the usual way as on the exercise of an unapproved share option. However, the gain will be calculated by reference to the market value of the shares on the date of the disqualifying event. Examples of disqualifying events include:

  • The employee ceasing to be a qualifying employee
  • The company ceasing to be a qualifying company
How do we work with The Mill Consultancy to get our EMI scheme in place - what's the actual process?

Here are the key stages in the setting up process, which normally takes 5-6 weeks:

1. We discuss your requirements, what you are seeking to achieve, and then run through the various alternative ways of structuring a scheme. Matters such as number or percentage of options, when the employees can buy their shares, what happens if they leave employment. We will take you through the main points that you should consider, and we'll provide advice as necessary.

2. We work out a valuation of the company for EMI purposes, agree it with you and then apply to HMRC for agreement of that valuation. This is essential because it sets a share valuation up front so that you and the employees know what their tax position should be, and how they could benefit. We will need your annual accounts for this and we will discuss your trading so we have a good understanding of your business and the market.

3. We draft the legal documentation, including the option agreement and board minutes. If you need other legal work done such as a new share class (e.g. because you want option holders to have non-voting shares) or a sub-division of the shares (e.g. from £1 to £0.01 per share to enable small percentages to be granted more accurately) we can do this too.

4. Once HMRC has approved the valuation and the legals are finalised, you issue the option offer letters to the lucky staff members and then the option agreements can be signed by the company and the employees. We help you with this part by providing a 'completion guide' so you just follow the steps laid out.

5. Once the options have all been granted, we then notify HMRC of the grants by completing an online procedure.

6. Payment of our fees - our fixed fee of £2995+vat is payable in two parts - £750 upfront on signing our engagement letter, and then the balance is due 6 weeks after that.

Annual reporting to HMRC - who does this?

We offer an ‘annual service plan’ at £249+vat p.a. for EMI that covers the following matters:

a) the online annual return to HMRC which covers each tax year and is due by 6 July following each tax year end on 5 April

b) dealing with any queries on options or the granting of new options

c) the paperwork required when an option holder exercises their options to buy the shares.

For clients with an unapproved option scheme as well as EMI, the annual fee would be £425. However note that you only have to register an unapproved scheme on the ERS section of your online PAYE service if a 'reportable even't has occurred and the grant of unapproved options in itself is not a reportable event; typically the first such event would be the exercise of options. Once the unapproved scheme is registered you then have to execute an annual return each year until such point as the scheme is cancelled. The £425 fee is therefore only chargeable when an unapproved scheme needs to be registered because of a reportable vent.

What if we don't qualify to have an EMI scheme?

There are other types of option schemes available. For example, if your trade doesn't qualify or if the scheme is for a larger number of employees (i.e. >250), please let us know, as there are schemes such as the CSOP (company share ownership plan), or an ‘unapproved’ scheme for non-executives and non-employees that we can help you with.