1. What is it?
1.1 As a share option plan, the EMI offers selected participants the opportunity to purchase shares at a specified time and price agreed at the time the options are granted.
1.2 Individual performance and retention conditions can be built in, helping to ensure rewards are only distributed when key corporate objectives have been met.
1.3 EMI plans are ideal for small and medium sized companies wishing to incentivise management and/or staff using equity arrangements.
1.4 Employers can grant EMI options as part of a plan to incentivise their employees.
1.5 The options are granted for commercial reasons, mainly in order to recruit and retain employees in the employer’s business; help the business to grow and to motivate employees.
1.6 EMI plans, if put in place properly, can be highly tax-efficient (see Summary Appendix) and companies have a high level of flexibility in choosing how the plan will operate.
1.7 The Government has set specific requirements for the type of companies which qualify to take advantage of the tax savings offered by EMI plans (see paragraph 2 below).
1.8 At present, the maximum entitlement of an individual EMI option holder at the date of grant of the EMI option is £250,000.
2. Does your company qualify?
2.1 Gross assets of no more than £30million.
2.2 Fewer than 250 employees.
2.3 Options granted to an employee (working at least 25 hours a week or 75% of working time at the company).
2.4 Company’s business does not fall under the exclusions (certain businesses are excluded because it does not carry out a qualifying trade). For certain businesses, we recommend seeking advance assurance that a company will qualify for EMI. Whilst HMRC’s list of examples of what is not a qualifying trade appears definitive, advance assurance will often come down to how a particular business operates. Wedlake Bell has recently been successful in obtaining advance assurance for an art gallery client which on first glance did not meet the qualifying company test.
2.5 Company must be independent (i.e. not a subsidiary of or controlled by another company).
2.6 Options granted must be over ordinary shares.
3. How it works – the steps
3.1 Valuation of the company
- 3.1.1. Actual Market Value (AMV) and Unrestricted Market Value (UMV) of the shares – this valuation usually applies a generous discount reflecting the minority shareholding to be placed under option.
- 3.1.2. Recommended that HMRC agree the UMV and AMV – usually valid for a 60/90 day period.
3.2 Putting in place EMI plan documents
- 3.2.1. EMI Option Agreement and Rules.
- 3.3.2. Letter of Grant (and employee guide).
- 3.3.3. Option Certificate.
4. Spring 2023 budget
4.1 Changes announced in the Spring 2023 Budget have made it easier for small and medium sized companies to offer EMI plans to their employees. The Chancellor, Jeremy Hunt, has removed some of the technical and administrative hurdles that companies have to get over before being able to offer EMI options. These include:
- 4.1.1. From 6 April 2023, relaxations around the type of information to be included within an EMI Option Agreement. Firstly, it is no longer necessary to detail the restrictions on the shares to be acquired under the option. Secondly, the requirement for the company to declare that an employee has signed a working time declaration when they are issued an EMI option has been removed. Note however that the working time requirement itself has not been removed. Both these changes operate retrospectively so that any EMI options granted before 6 April 2023 that have not been exercised will also benefit from the changes; and
- 4.1.2. From 6 April 2024, the government will also extend the deadline for notifying EMI options from 92 days following a grant to the 6 July following the end of the tax year. This brings the EMI share option reporting obligations into line with the annual share reporting process that all companies go through for other share plans.
4.2 The above simplification measures are very welcome. Quite often on corporate deals we find that the award and grant of EMI options falls short of the legislative requirements because prescriptive administration requirements have not been followed as assiduously as they should have. This can frustrate or delay deals whilst the issues are dealt with, and ultimately put the tax advantages of EMI options at risk purely due to an administrative mistake. Hopefully these relaxations can reduce costs for clients and enhance the main objective of EMI – to recruit and retain employees.
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