EMI Share Options

Overview of EMIs

Enterprise Management Incentive (EMI) share options are a type of tax-advantaged share option designed to incentivise and retain key employees in small and medium-sized enterprises (SMEs) in the United Kingdom.

Qualifying companies can grant EMI options to their UK employees under an EMI share option scheme. EMI options give the employee the right to purchase shares in the company at a pre-agreed price, known as the exercise price.

There are a number of benefits for both the companies that grant EMI options and the employees that receive them.

What are the benefits of granting EMI options?

Companies

• EMI options can be granted with an exercise price that is below the “market value” of the shares over which the option is granted (often the exercise price is the nominal value of the share). This means that employees can make a significant profit when the option is exercised, and the shares sold. Further, companies do not need to pay National Insurance Contributions (NICs) when granting EMI options to employees. Both these things allow companies to provide attractive remuneration packages to employees without depleting their cash reserves by paying large salaries.

• In addition, the costs of setting up and administering the EMI can be deducted from the company’s corporation tax bill. There is also a possibility that the net market value of the options exercised by employees following a successful exit may be an allowable expense for the company, again reducing its tax bill.

Employees

• EMI options are a tax-efficient way for employees to receive additional remuneration as there is zero income tax or national insurance contributions payable when the options are granted.

• Furthermore, if the shares are held for at least two years, any gains on the shares can benefit from Business Asset Disposal Relief (BADR) (formally known as Entrepreneurs' Relief), which reduces the capital gains tax payable by the employee on the sale of the shares from 20% to 10%.

Company/employee alignment

• It’s not all about money though. As well as the potential benefit to an employee’s pocket that comes with the potential growth in value of the shares granted, the most consistent benefit we hear from companies about their implementation of an EMI scheme is the impact that it has on employee “buy in”. Share options make employees feel like they have a direct stake in the success of the company, they align themselves with management and other shareholders and start to think of themselves as fellow long-term owners of the business.

Is my company able to grant EMI options?

EMIs are specifically targeted at SMEs and therefore only certain companies are able to grant them. The company must:

• be independent of other companies (i.e. not be a subsidiary of another company)

• have gross assets of £30m or less;

• have fewer than 250 full-time equivalent employees;

• be a trading company or the parent company of a trading group and not be carrying out certain restricted trading activities; and

• have a UK permanent establishment.

Which of my employees can participate in an EMI scheme?

Importantly, only employees that are tax-resident in the United Kingdom can be granted EMI options. The employee must also work at least 25 hours per week or, if less, 75% of their working time for the company and not hold a “material interest” (broadly 30% of the company’s shares) in the company.

What about overseas employees and contractors?

Companies with overseas employees will often grant employees “Non-Tax Advantaged” (NTA) options. As the name suggests, NTA options don’t provide the same tax benefits to the company / employees as EMI options. However, NTA options are not subject to the restrictions that apply to EMI options or other tax-advantaged share schemes in the UK (such as those granted under a Company Share Options Plan (CSOP)). They can therefore be granted to consultants or advisors and overseas employees, and, as such, can be a very effective tool to align those individuals with the long-term growth of the company.

Common pitfalls

Implementing an EMI option scheme can be complicated. The scheme must comply with the applicable requirements under English law for the options to retain their tax benefits. Failure to properly set up or administer an EMI option scheme will result in the options being treated as NTA options. This can have significant tax consequences for the company, who will be liable to pay NICs in respect of the options that have been granted, and the employees who will have to pay income tax and capital gains tax at the higher rate on any sale.

Conclusion

While EMI options can provide tangible benefits for both SMEs and their employees, it is important that companies and employees seek professional advice before implementing and/or participating in an EMI option scheme.

The team at LawSimple has helped a number of SMEs establish EMI and NTA option schemes and can help talk you and your team through each step. Drop us an email today for a no-obligations call to discuss how we can help.