EMI in a nutshell
EMI stands for Enterprise Management Incentives, which is the name given to a tax-advantaged share option scheme whereby employers can incentivise employees by awarding them options to acquire ordinary shares in the employer company without incurring an income tax charge. Normally under a share option scheme, the employee pays income tax on the difference between the option price of the shares and their market value when the option is exercised, but this does not apply to EMI options. An EMI option must be exercised within ten years of its being granted. Companies can grant options over shares worth (at time of grant) up to £250,000 to an eligible employee.
What conditions apply to the company?
The EMI scheme is aimed at relatively small trading companies. The company may be quoted or unquoted but must be an independent company trading or preparing to trade whose gross assets do not exceed £30 million and which has less than 250 full-time employees. The company must have a permanent establishment in the UK. The total value of shares in respect of which unexercised EMI options exist must not exceed £3 million at any time.
The company’s business must not consist wholly or substantially in the carrying on of excluded activities. There is a lengthy list of excluded activities, not dissimilar to the corresponding list for qualification for the Enterprise Investment Scheme. They include, for example, dealing in land or securities, banking, leasing, farming and providing legal or accountancy services.
What conditions apply to the employee?
Employees are eligible to be granted an EMI option if they are employed by the company (or by a 51% subsidiary of the company) for at least 25 hours per week or, if less, at least 75% of their total working time, and they control no more than 30% of the company's ordinary share capital. As regards the working time requirement, certain periods of absence are permitted, eg reasonable holiday entitlement, sick leave and statutory leave.
In what circumstances can an income tax charge apply?
The intention of the EMI scheme is that the option must be to acquire shares at no less than their market value at the time the option is granted. If this is not case, there is a potential income tax charge. The amount chargeable to income tax is limited to the excess (if any) of chargeable market value over the price paid on exercise (plus anything paid for the option itself). Chargeable market value is the lower of the market value of the shares at the time of grant and their market value at the time of exercise.
An income tax charge can also occur if there is a disqualifying event (see below) in relation to an EMI option before it is exercised. To avoid a potential charge, the option must be exercised within 90 days after the date of the disqualifying event. If not, the charge is on the 'post-event gain' (if any) less any consideration given for the option itself. If there would in any case have been a charge as above, the chargeable amount is increased by the post-event gain. The post-event gain is the amount (if any) by which the market value of the shares on exercise exceeds their market value immediately before the disqualifying event.
What are disqualifying events?
A number of possible events are classed as disqualifying events. These generally relate to changes in circumstances such that, had the new circumstances subsisted when the option was granted, it would not have been a qualifying EMI option. So, for example, if the company comes under the control of another company, so that it is no longer an independent company, that is a disqualifying event. Similarly, if it breaches the trading requirements, eg by ceasing to carry on a trade or by carrying on an excluded activity. As far as the employee is concerned, if they cease to be employed by the company or subsidiary, or if their working time falls below the required limits, that is also a disqualifying event. Other disqualifying events include certain variations in the terms of the option and certain alterations to the company’s share capital.
What is the capital gains tax position?
A gain on the disposal by an individual of shares acquired under an EMI option is a chargeable gain. The cost of acquisition of the shares is computed in the same way as for non-tax-advantaged options, ie it is the actual consideration given for the shares plus any consideration given for the option itself plus any amount charged to income tax. Chargeable gains realised on shares acquired by the exercise of EMI options may be eligible for capital gains tax business asset disposal relief (previously known as entrepreneurs' relief).
What are the employer company’s compliance obligations?
Notice of the grant of an option must be given to HMRC by the employer company within 92 days after the option is granted, failing which the option is not a qualifying EMI option. A company whose shares are subject to EMI options must also make annual returns, subject to penalties for non-compliance.
What powers do HMRC have to check compliance?
Where notice of a grant of option is given, HMRC may enquire into the option or, more specifically, into the employee’s commitment of working time. HMRC also has wide-ranging powers to require any person to furnish it with relevant information.