Tax Helpsheets | SIR-AJ & CO

Incentives for Enterprise Management

The Enterprise Management Incentive (EMI) is a form of share option scheme, which can be used to provide tax-efficient targeted incentives to key employees or employee groups. Under the scheme, the employee is granted the right to purchase shares in the employing company in the future (an option) at a price set at the date of grant (the exercise price). The employee gains when the value of the shares rises above the exercise price. The EMI is designed for use by smaller companies with assets of £30 million or less.

Tax Effects

The exercise price can be set at the discretion of the employer. If set at or above fair market value at the date of grant, there will be no income tax or national insurance payable on the grant, or the exercise of the option. When the shares acquired through the exercise of the option are sold, then the individual will be liable for capital gains tax on the profit, although only at a 10% CGT rate for disposals after 6 April 2013.
If the exercise price is set below fair market value at the date of grant, income tax will be payable at exercise equal to the difference between the exercise price and fair market value. The remainder of the gain will be subject to capital gains tax. In a private company, the fair value of the shares is negotiated with HM Revenue & Customs (the value being taken before allowance for any restrictions on the shares).

From April 2013 for CGT, entrepreneurs' relief also applies to gains on EMI shares without the usual requirement to hold a minimum 5% stake in the company. For this to apply, the option will have to be exercised on or after 6 April 2012 and the shares must then be held for a minimum period of one year before sale. It will also be necessary to stay an employee until the shares are sold. The other usual conditions for Entrepreneurs' relief will need to be met. If more than 5% is held, they already qualify for entrepreneurs' relief, subject to the usual conditions.
EMI shares will also qualify for business asset inheritance tax relief subject to the normal rules for that relief.

Individual Performance Conditions

Individual performance conditions can be attached both to the grant and the exercise of each option, and EMI options can therefore be used as powerful short-term or medium-term incentives, or both. There is no statutory minimum period before options can be exercised, although most employers impose a minimum limit of say two or three years. Normally there will be a maximum exercise period of 10 years, although this can be shorter at the employer's discretion.

HMRC Approval

There is no need to obtain prior HM Revenue & Customs approval before establishing a scheme. However, companies operating an EMI scheme must meet detailed conditions and make annual returns. Schemes will be subject to inspection by HM Revenue & Customs. Many private companies will wish to ensure that employees can convert their shares into cash without the company having to be sold or floated. This can be done through the creation of an internal market in the shares, effectively provided by the employer.

Main Conditions to Meet

The Company and Shares

The company must be independent, with a permanent establishment in the UK and gross assets not exceeding £30 million at the date EMI options are granted. It must also carry on, or be prepared to carry on a qualifying trade. This is a trade which is:

On a commercial basis with a view to a profit;
Does not consist of excluded activities such as dealing in land, financial activities, property-backed businesses such as hotels and nursing homes, farming, accounting services, and others.

Each employee may be offered options over shares worth up to £250,000 at the date of grant (this is a limit that applies to all options granted within three years). The shares used must be non-redeemable but may be of any class, with or without restrictions, and maybe non-voting.
EMI is limited to qualifying companies with fewer than 250 employees. There is an overall limit on the value of the shares under the option of £3 million per company.

The Employee

The employee is required to spend...

At least 25 hours each week, or
At least 75% of their working time (taking account of all their remunerative working time in employment and self-employment)

as an employee for the company or a qualifying subsidiary of the company.
Whilst an employee can be a director, they are in broad terms not eligible if they have a material interest of more than 30% of the ordinary share capital in the company.