For early-stage tech companies, offering market rate salaries occasionally isn’t an option due to current cash flow so giving equity can offer an attractive alternative which aligns interests of a company’s owners with that of employees. Offering an option scheme will attract and retain the best talent in the job sector, which is important for start-ups and early-stage businesses struggling to grow in competitive industries.
What is Enterprise Management Incentives (EMIs) Scheme?
An Enterprise Management Incentive, or EMI, is a government-backed, tax-advantageous share options scheme. It is mainly used by small to mid-sized UK businesses looking to share their successes with their team as their company grows. The scheme allows employees to acquire shares in a company at a specified price at a future date. Many companies give employees shares from the get-go. However, this will involve employees having to pay for their shares or suffering a tax charge if their shares are bought at less than market value or are gifted to the employee.
What are the benefits of EMI Share Option Scheme?
- A corporation tax deduction may be available on disposal of options for employers
- Aligns employees’ interests with the company’s commercial objectives
- Retains staff in the business, as employees see the growth of the company reflected in the increase of the share value.
- A vested interest in the company brings a more committed and motivated workforce and they feel appreciated.
What are the conditions for business to get qualified for EMI Share Options Scheme?
- The company must have gross assets of no more than £30m
- The company must be independent– it must not be a subsidiary of or controlled by another company.
- The company must have a permanent establishment in the UK
- The company must have less than 250 employees.
- Shares used must be ordinary shares–they need not have all the rights of ordinary shares.
Who can receive EMI options?
It is entirely up to the company who they would like to award EMI options. These are also eligibility requirements for individual employees:
- A company can award up to the value of £250,000 per employee. (£3 million for the whole company).
- Employees including directors must qualify at least 25 hours per week for their company or group or, if less, for at least 75% of their working time.
- Employees may not hold more than 30% of the company’s shares.
How does the tax work on EMI Schemes for employees?
As long as the option exercise price is not less than the market value of the shares at the time of option grant:
- There is no income tax or NI payable by the employee
- When the employee exercises their rights, they will only be required to pay the pre-agreed market price. No liability will immediately fall on the difference in value.
- When the shares are eventually sold, capital gains tax (CGT) will be due on option gains (the amount by which the sale price exceeds the exercise price).
The company will often be able to claim a deduction against corporation tax for the full amount of an employee’s option gains.
How to setup an EMI scheme?
There are a few legalities that need to be checked before a scheme is put into place. Each company will need to ensure that their articles of association allow for a scheme to be implemented. Daft rules will need to be created for the scheme and an agreement between the employer and employee will have to be drafted. These rules, outlining how the option will vest, when it can be exercised, what happens during an exit, and what happens to an employee’s option when they leave the company.
It is recommended to ask HMRC to approve the market value of the shares before they are issued to prevent an unexpected liability in the future. The valuation agreed with HMRC is valid for 120days (prior to COVID it was 90days).
The valuation submitted to HMRC will confirm two values;
- Unrestricted Market Value – exactly how much the shares are really worth.
- Actual Market Value – this is what the shares are worth but discounted for restrictions.
Once you have an approved HMRC valuation, you can send out option agreements to your employees. You need to tell HMRC about EMI your options grants (a ‘notification’) within 92 days. Late filing charges can quickly add up. In addition to the notifications, your company will need to complete an Annual Return. You need an EMI expert to help you prepare all the filing for Annual return.
Share option scheme has been created to retain key talent at early-stage of growth and companies that do not offer options may be at a competitive disadvantage in their recruitment and business growth process. Share option scheme are becoming an expected “perk” and must have in the tech start up world. If your company has yet to implement an option plan, maybe now is the time to consider it.
Dragon Argent provides our clients with entrepreneurial yet robust EMI Share Scheme advice. We are uniquely positioned to assist businesses set up employee incentive schemes in the most tax efficient way possible. We combine accounting, tax and legal advice to assist with every step of the process; from the required company valuation through to issuing of growth shares, please reach out to our tax advisors by scheduling a discovery call.
‘This article comes courtesy of Dragon Argent, they can help startups and small medium businesses find the most tax efficient ways to incentivise employees with EMI share option schemes’