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EMI Option Schemes: What you need to know

Starting an EMI Share Options Scheme: everything you need to know

Following our last article, ‘A Guide to Issuing Shares to Employee’ this week we will be looking in to one of the most commonly used option schemes for UK employees; the EMI Option Scheme. Its popularity is due partly to the fact that it is relatively more flexible than other types of option scheme and largely because it provides significant tax breaks to employees and the employer company.

Our Head of Corporate & Commercial Law, Freddie-Nicolle Brace has provided a high-level analysis of EMI share option schemes below.

What is an EMI Share Option Scheme?

An EMI option Scheme is the most tax-efficient way to grant options to your UK resident employees as the Scheme is backed by HMRC. It’s designed for employees or directors who work over 25 hours per week or over 75% of their total working hours.

What are the advantage and disadvantages of an EMI Share Option Scheme?


ADVANTAGES


✔️ Tax advantaged scheme which means that:

✔️ Employee benefits

(a) if an EMI option is granted with an exercise price at least equal to the actual market value of a share at the date of grant, no income tax or NICs will be payable when the option is exercised;
(b) EMI options granted at least 2 years before the option shares are sold may qualify for Business Asset Disposal Relief;

✔️ Company benefits

(c) there is potentially corporation tax relief available for the company on the acquisition of shares following the exercise of an EMI option;
(d) the company can elect to pass on employer's NICs to the employee who is granted the option

✔️ Advanced Assurance can be obtained from HMRC to ensure that the company qualifies to grant EMI options

✔️ Self-certification is not required

✔️ Bespoke schemes can be drafted giving companies flexibility to decide how they want the scheme to work

✔️ Doesn’t need to be offered to every single employee, the company can choose who it wishes to grant options to

✔️ Existing shareholders are only diluted if and when the employee exercises their option

✔️ Can be exercised immediately

✔️ The limit on how many EMI options individuals can hold is far higher that other tax advantaged schemes


DISADVANTAGES


❌ The company must be a qualifying company – certain trades will be unqualifying

❌ Can only be granted to UK employees

❌ Working time requirements must be met by employees for them to be able to be granted EMI options

❌ Employees who have a “material interest” in the company will not be eligible

❌ EMI options are subject to disqualifying events which may void the tax advantages

❌ No corporation tax relief on the set up costs of the scheme

❌ Registration of the scheme and grants as well as annual filings are required within strict time limits

❌ An EMI valuation will need to be carried out by the company and agreed with HMRC prior to making any grants- these will need to be done periodically as they last 120 days

❌ Once a company has granted an EMI option under certain terms, it can only change these in very limited circumstances

❌ There are limits on how many options can be awarded both company wide and in relation to each individual

When is an EMI Scheme best used?

  • the company has a large amount of UK resident employees

  • options are intended to be granted to some employees and not others

  • employees are not already shareholders of the company

  • the company needs a bespoke scheme with performance targets and vesting schedules etc.

  • the company has gross assets of less than £30m

Which employees will be eligible for EMI Options?

In order to be granted EMI options, an employee:

  • must spend at least 25 hours per week or 75% of their total working time as a company employee as mentioned above

  • may not hold more than 30% of the company's shares

  • may not hold options worth more than £250,000 (at the time of grant)

What does the EMI Scheme setup process look like?

  1. Establish eligibility: Ensure that your business, employees and options meet the EMI criteria

  2. Authorise the share option pool: If you haven’t already done this within your Articles of Association or Shareholders’ Agreement, you may need to obtain consent from the board and/or shareholders of the company to be able to grant the options. This will depend on what your constitutional documents say.

  3. Undertake and submit an EMI valuation: Your business must agree with HMRC both an actual market value and unrestricted market value for the shares over which options are to be granted under the EMI Scheme. An EMI valuation will need to be undertaken and sent to HMRC for this purpose.

  4. Grant the options: At this stage options may be granted to employees provided that you have enough allocation to cover the options being granted within your share option pool  In practice this means that a board meeting will take place and board minutes will be produced together with the consents necessary to grant the option will be given. On or after the employee has started with the business, the EMI Option Agreement will be signed by both the employer and the employee.

  5. Register with HMRC: Finally, register your EMI Option Scheme and individual grants within with HMRC within 92 days from the date the EMI Option Agreement is signed and dated.

The process of granting EMI share options can be challenging for founders, who have many other things to focus on. And this is precisely why our team of EMI experts - can assist with the setup of your EMI scheme, help you agree it with HMRC, create dynamic vesting schedules, and make the long-term management of your issued options easier. By using our service, you will be able to avoid hassle and unnecessary costs and ensure that your business stays compliant through to exit.

Point to consider:

Before setting up an option scheme of any kind, companies must understand and be comfortable with the concept of dilution. If more shares are issued in a company using options, the percentage ownership of existing shareholders will decrease when those options are exercised as the overall total shares in the company increases.

Disclaimer: the guidance contained in this article is not a substitute for legal advice. Before implementing any option schemeyou should seek appropriate advice from a qualified legal professional.

Schedule a discovery call with one of our experts and we will be happy to help you.

Relevant guide to EMI Share Option Schemes:

Author

Freddie-Nicolle Brace

Head of Corporate & Commercial

Email - freddie-nicolle.brace@dragonargent.com

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