What is an EMI Scheme?17 Nov 2023
An EMI Scheme is a UK government incentive designed to provide tax-advantaged share options for employees of SMEs. It stands for Enterprise Management Incentive, and it acts as a way for business owners to reward employees by giving them a share in the company. Often, EMI Schemes are offered to key team members such as executives or managers as a way to incentivise and reward hard-work.
So wondering how it actually works? Look no further:
How does an EMI Scheme work?
Enterprise Management Incentives give employees the option to buy shares in their company at an agreed price. When the company comes to exercise those shares (sell, or pass on ownership of the business) the employees can sell their shares at a higher price in a tax-advantaged way, (hopefully taking home some tasty profit).
Once the company works out who is eligible, they can decide the number of shares offered and the exercise price (i.e. the price at which they can purchase the shares).
Then comes what’s known as a ‘vesting period’ where employees must remain with the company to be eligible to exercise the options. This will vary case by case. The vesting can also be subject to company performance-related targets such as turnover or profit levels.
Once employees have worked through this vesting period, they then have the right to buy the shares at the agreed price, often with a predetermined time period known as the ‘exercise window’.
Tax benefits of EMI Schemes
When the employees decide to sell or ‘exercise’ their shares, this is where the tax advantages kick in. If they make a profit on those shares, the profit gained may qualify for Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief), which can result in a lower rate of Capital Gains Tax. Bosh.
Lyndsey acquired 1000 shares via a qualifying EMI option at £20 per share.
She sells the shares a year later for £50 per share.
Sale Proceeds £50,000
Less: Acquisition Cost (£20,000)
Annual Exemption (£6,000)
Gain Chargeable to CGT £24,000 (assuming BADR applies)
CGT Payable £2,400
Lyndsey Banks £27,600
It’s not just the employees clawing back that precious tax, employers can also benefit too, and here’s how.
- Corporation Tax – businesses can potentially claim a Corporation Tax deduction for the difference between the market value of the shares and the exercise price to reduce the company’s taxable profits.
- Succession Planning – no we’re not talking about Kendall Roy and co… This succession planning will let you transfer the ownership of the business with tax advantages for the employer and employees.
Of course, the caveat with anything tax or legal is to speak to an expert, as things move fast and regulations change.
What Businesses Qualify for an EMI Scheme?
EMI Schemes are used by employers to incentivize and reward key members of staff by offering them a stake in the business. But working out if your business is eligible for the scheme is the first step.
- Independent Trading Company – you must be an independent trading company or the parent company of a group, that’s actively involved in trading (so not an investment or a non-trading company essentially!)
- Relevant Industry – not every industry qualifies for EMI Schemes, so if your business works in banking, farming, property development or some legal or financial services, you may have to give it a miss.
- Gross Assets Limit – your business’s gross assets shouldn’t exceed a certain amount as of November 2023, the threshold was £30m, but be sure to check the latest rules.
- Permanent Establishment – your business must have permanent residence in the UK, which can include an office, factory or another facility (fairly pretty self-explanatory).
- Size Limit – your business must not have more than 250 full-time employees when you decide to get involved with the scheme.
What Employees Qualify for an EMI Scheme?
So that’s the business side covered, but what about those lucky employees that you’re hoping to reward? What do they have to do to qualify? Do they have to jump through hoops? Maybe do a little dance? Well, not quite…
- Working time – they must be working at least 25 hours a week for the company or its group companies, or if it’s less, then it should make up 75% of your total working time. Directors are considered employees and must meet the working time criteria.
- Material Interest – they can’t have any material interest in the business before EMI options are granted. This usually means holding more than 30% of the company’s shares or having voting rights.
- Unconnected – they also mustn’t be connected with a person who has a material interest in the company, so any relatives, associates or anyone with significant interest.
Of course, business owners need to make sure they check the rules and regulations. Things change like the wind, and this goes for the tax treatment and how that impacts both employees and employers.
How to set up an EMI Scheme
So this is the bit where business owners often get help from professionals.
A good solicitor will help you assess whether your business is eligible and meets the parameters to qualify for an EMI Scheme.
They’ll also do an audit of your Articles of Association to make sure nothing has to be amended before the scheme kicks off. (Articles of Association are essentially the guidebook that governs how a company operates and they cover a lot of bases).
If you tick all these boxes, they’ll help you draft a bespoke EMI Scheme setting out the terms and conditions of the options and the process for granting and exercising shares.
They’ll draft unique option agreements outlining the terms between the company and each employee. This will set out the terms of the option including the exercise price and conditions.
Gaining a business valuation is also a key step and will help decide the exercise price.
The next step is to make an application to HMRC with professional help to decide the exercise price. This will provide certainty on the tax position on the shares come the day of reckoning.
Are EMI Schemes worth it?
The primary reason behind an EMI Scheme is to help align the interests of key employees with those of the company and its shareholders and owners. They can be great for attracting and retaining talent and pushing growth. They also let the wider team share in the company’s success. Oh and they give a tax kickback to both the employer and employees.
(Much more than just company dogs or ping-pong tables.)
Every business is different, and not every business will qualify. So in the first instance, it’s worth checking your eligibility, and if that’s big fat yes, then speak to a professional to work out if the scheme is for you.
If not, you can always waste your life-savings on a pyramid scheme, invest in bitcoin or maybe even join the circus.
Fancy a chat?
Nick CharnleyTax manager
Speak to Nick Charnley
Nick CharnleyTax manager
Anything Tax related, Nick is your man.
An expert tax planner who knows the UK tax laws like the back of his hand, Nick is the guy to speak to if you’re looking to save a pretty penny and get some proactive advice.
Did you know: Nick has worked on behalf of premier league footballers and well-known actors over the years, and has been involved with a whopping 45,000 self-assessment tax returns over the years.