​EMI option schemes – are you eligible?

Here I will explain the rules that determine whether a company is eligible for EMI and then whether individual employees are eligible.

What companies qualify for EMI?

Most business activities are eligible, but certain types are excluded and these include:

* dealing in land, commodities or shares

* dealing in goods, other than normal wholesale or retail distribution

* banking, insurance, leasing or other financial activities

* receiving royalties or other licence fees

* legal or accountancy services

* property development

* farming, forestry activities or market gardening

* operating or managing hotels or nursing and care homes

The company must be independent and not under the control of any other company. So shares in a subsidiary cannot be used in an EMI option, i.e. the shares must be in the parent company. The rule for this is quite clear: the EMI company must not be a subsidiary of or controlled by another company. This has occasionally been complicated by cross-shareholdings between individuals and other companies.

Another rule is that any companies controlled by the EMI company must be at least a 51% owned subsidiary i.e. the EMI company owns more than 50% of its share capital. This can be a problem in the case of joint ventures where two companies own 50% of a third company, but may have effective control over it. If one of the owners is an EMI company, this situation could be a disqualifier. 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.

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.

Finally, the gross assets of the company or group must not exceed £30 million and it must have fewer than 250 employees. Gross assets means the value of the assets only in your balance sheet – ignoring liabilities such as creditors.

What employees qualify?

Employees must work for the company for at least 25 hours a week, or for at least 75% of their paid working time (which includes time spent in self-employed work) and not have a “material interest” in the company already i.e. more than 30% of the shares of that company.

If you are ineligible for some reason

Sometimes a company or person is simply not eligible for EMI . In this case, other types of option or share schemes can be used, such as the CSOP (company share ownership plan), an ‘unapproved’ scheme for non-executives and non-employees, or a Growth Share plan. None of these is as good as an EMI in tax terms, but they still enable an equity stake in the company.