5 things you should know about Enterprise Management Incentives.
1. An Enterprise Management Incentive (“EMI”) is an option to purchase shares granted by a company to an employee which meets the various qualifying criteria and, therefore, qualifies for special tax treatments.
2. EMIs offer generous tax advantages to both qualifying companies and participants, as follows:
- no income tax or National Insurance contributions ("NICs") on grant of the option;
- no income tax or NICs on exercise of the option (as long as the exercise price is set at a value equal to or greater than the market value of the shares on the date the option was granted);
- on disposal of the shares acquired pursuant to the EMI option ("EMI Option Shares"), the individual's gain is subject to capital gains tax at a lower rate than income tax;
- Entrepreneurs' Relief may be available on the disposal of EMI Option Shares, meaning gains on disposal may be taxed at just 10%.
3. There are a number of legal requirements which companies must satisfy in order for their share options to qualify as EMIs, including:
- the company must carry on a "qualifying trade" in the UK;
- the company must not have gross assets exceeding £30 million at the time the share option is granted; and
- the company must have fewer than 250 full-time equivalent employees at the time the share option is granted.
The shares used for EMI options can be subject to restrictions, but they must be ordinary shares which are "fully paid up" and not redeemable or convertible.
In order to qualify, participating employees must spend at least 25 hours per week or, if less, 75% of their working time, on the business of the company. Individuals with a “material interest” in the company, either on their own or together with one or more associates, are also unable to participate.
4. Employees must be able to exercise EMI options within 10 years. The option terms must be set out in a written agreement which must detail any restrictions on the shares. The company must deliver, electronically, an annual return to HMRC in respect of the EMI options.
5. It is recommended that companies establish the market value of the shares that will be put under option before EMI options are granted. The value can be formally agreed with HMRC, or the company can use its own valuation although it would then be open to HMRC to query this. HMRC must be notified electronically of any grants of EMI options within 92 days of the grant date. HMRC has 12 months to make enquiries as to eligibility. If it does not make such enquiries, and all information provided is correct, then the share option is deemed to qualify.