Share Schemes: Is your company EMI eligible?

A follow-up to our June article “How to Incentivise Staff following the COVID-19 Crisis” and an overview of the legislative conditions required for companies to grant EMI options.

A popular tax-advantaged share scheme is the Enterprise Management Incentive Scheme (“EMI”). An HMRC research report found that “the EMI scheme had led to increased equity investments” and the majority of adopters surveyed “perceived EMI to be successful in helping companies retain key and skilled staff and improve staff morale”.

Employee share schemes are well established means of retaining and incentivising staff. Whilst for some companies implementing such schemes is a way of keeping pace with the competition, they also help to generate a genuine culture of engagement and sense of ownership among employees. It is easy to understand why EMI schemes are popular among SMEs considering their favourable tax treatment for employees:

• No income tax liability on the grant of the EMI options

• No income tax liability on the exercise of the options if, at the time of grant of the options, the exercise price was at least equal to the market value of the shares in the company

• If the exercise price was less that the market value of the shares then income tax is due on the difference between the exercise price and the market value at the date of grant

• On a sale of the EMI option shares, there will be a capital gains tax liability on any gain over the market value at the date of grant

On exercise of EMI options, there may also be a corporation tax deduction for the company. The deduction is the difference between the market value of the shares on the date of exercise and the amount the employee pays for them.

Companies must satisfy a number of requirements to be EMI eligible:

Independence	The EMI company must not be a 51% subsidiary of another company OR under the control of another company and any person connected with that other company.
Qualifying subsidiaries	Any subsidiaries of the EMI company must be a “qualifying subsidiary” meaning that the subsidiary is a 51% subsidiary of the EMI company and no other person or entity other than the EMI company has control of the subsidiary (special rules apply for property companies).
Gross assets	The EMI company’s gross assets must not exceed £30 million. In the case of a parent company, the group assets must not exceed £30 million.
Number of employees	The full-time equivalent number of employees in the EMI company (and any subsidiaries) must be less than 250.
Trading activities	The EMI company must exist wholly for the purpose of carrying on one or more qualifying trades AND is actually carrying on a qualifying trade (or preparing to do so). A qualifying trade is a trade conducted on a commercial basis and with a view to the realisation of profits and does not consist in the carrying on of “excluded activities”.
Excluded activities (a non-exhaustive list)	Examples include dealing in land, commodities, securities, banking, insurance, money-lending/financing, leasing, legal/accountancy services, property development, farming, woodland management, shipbuilding, producing coal/steel, hotel management, nursing home operating/ management.

Companies considering implementing an EMI scheme should be aware that there are further rules that need to be followed to ensure EMI eligibility such as which employees can be granted EMI options, what shares can be used to grant EMI options, individual and company EMI limits, disqualifying events and HMRC filing requirements.

Our experts can help your business if you are considering implementing an EMI share scheme. We can advise on and deliver the required paperwork for both the company and the selected employees.

---

Related Expertise