Enterprise Management Incentive – EMI Schemes

EMI Schemes: Low Risk, High Reward

Since its introduction under the Finance Act 2000, the use of Enterprise Management Incentive (EMI) schemes has steadily grown amongst its target participants, small and medium-sized businesses. In 2023, out of just under 20,000 companies in the UK which utilise any type of Employee Share Scheme (ESS), 89% chose to use an EMI scheme. So why is this considered such a valuable tool for employers?

How do EMI schemes work?

Firstly, let’s take a brief look at how EMI schemes work in practice. They allow companies with less than 250 employees to offer key members of staff share ‘options’ over the company’s shares. This means the employee will have the right to acquire the shares at some point in the future but at a predetermined price. This price will be agreed in a contractual document when the option is granted. If the employee later wants to buy the shares, they will be able to ‘exercise’ the option and pay the set price.

The scheme also provides significant tax advantages for both the employee and the employer. For example, neither the employer or the employee has to pay Income Tax or National Insurance contributions when the option is granted. Some tax may be payable when the employee exercises the option (decides to buy the shares). This occurs only if the market value of the shares has risen to higher than the predetermined price. When the employee decides to sell their EMI shares, any profit from the sale will be subject to capital gains tax (10%) instead of income tax (up to 45%). In addition, employers utilising the scheme may be granted a corporation tax deduction when their employee decides to exercise the EMI option. This applies as long as specific statutory conditions are satisfied.  

Unlike other Company Share Option Plans (CSOPs) available for larger companies with more than 250 employees, there is no minimum period of time that the EMI options must be held (i.e. not exercised) in order to obtain these tax benefits.

Why are EMI schemes so popular?

We asked our clients their thoughts about the adoption and implementation of the EMI scheme. Their feedback revealed three main reasons for their decision:

1. To reward and incentivise senior staff members
2. To make their reward scheme tax-efficient
3. To retain current employees and attract new talent

In particular, our clients emphasised the impacts of allowing key employees to own part of the business;

Along the same lines:

This comment is a nod to the flexibility of the EMI scheme. If employees who are currently holding options decide to leave the company, this is classed as a ‘disqualifying event’. This means that only the period of time between the grant of the option and the employee’s departure is considered when deciding the level of tax relief. Consequently, they cannot make any further gains once they have left the company.

In addition, Laura Fursdon (Calder & Co) detailed that the scheme allowed the company to 

Retain employees in who we invest considerable training, and where strong relationships are key to our business success. 

She adds that

We believe this will not only boost employee retention but also make us a more attractive employer to new talent who appreciate being part of a company that recognises the value they bring.

This feedback is reflected amongst SMEs across the UK: a government report indicated that 84% of EMI adopters believe it has helped their company retain key staff and 85% believe it has improved staff morale. Just over half reported that EMI helped recruitment efforts and attracting new talent. 

Legal rules governing EMI schemes

What makes EMI schemes stand out is the high maximum value that individual employees are allowed to hold as options. This most likely explains their popularity amongst SMEs. Other schemes (CSOPs), which have no restrictions on the number of employees and so are more accessible for larger companies, have a set maximum value of £60,000 that an individual may hold as unexercised options (as of 6th April 2023). In contrast, the maximum value of shares that may be held as options by an individual employee in an EMI scheme is £250,000. There is a cap on the overall maximum value of options that may be granted by the company under an EMI scheme. This is currently set at £3 million. However, the limit only applies to unexercised EMI options. So, as employees exercise and sell their options, the company will be able to grant more if needed. 

There are several other rules governing EMI schemes, for both employers and employees. These are set out below:

EMI rules for companies:

• The company must not be controlled by another company (i.e. where a parent company owns over 50% of its shares)
• The company must only have ‘qualifying’ subsidiaries (i.e. the company must hold more than 50% of its subsidiaries’ shares, and this increases to 90% for subsidiaries which manage property)
• The value of the company’s gross assets must not exceed £30 million
• The company must have less than 250 full-time or full-time equivalent employees
• The company must undertake a ‘qualifying trade’ (certain trades such as property development and running hotels or nursing homes are excluded)
• The company must have a permanent establishment in the UK

EMI rules for employees:

• The employee must spend at least 25 hours a week (or 75% of their working time) working for the company
• The employee must not own more than 30% of shares in the company

Practical steps for EMI qualification

When EMI schemes were first introduced in the Finance Act 2000, an overriding ‘commercial purpose test’ was written into the statute. Lawmakers expressly stated that in order to use the scheme, the company must only issue options for commercial reasons, such as an incentive to recruit or retain employees, rather than simply the avoidance of tax. Nevertheless, this is an extremely tax-efficient tool. It is specifically targeted at SMEs, so it is important to make sure your company is sufficiently qualified.

In order to obtain these significant tax advantages, the EMI scheme must be registered online. The government runs a self-certification process, so pre-approval from the HMRC is not necessary. However, it is possible to obtain advance assurance that your company qualifies. The company must also notify HMRC of the grant of an EMI option. This must be done within 92 days of the grant. This deadline is strictly upheld. Failure to notify HMRC in time is one of the most common reasons for EMI options losing their qualifying tax status.

Conclusion

EMI schemes are regarded by many SMEs as a ‘valuable tool’ (Laura Fursdon, Calder & Co), as they allow the company to ‘effectively reward and incentivise key staff members for past work and future work, in a tax efficient way’ (Damien Stork, CHX Challenge). EMI schemes are only growing in popularity and awareness, and the restrictions on qualification mean that this is an advantage that can only be utilised by small and medium-sized businesses. For more information on the law surrounding EMI schemes, contact Farringford Legal today.

For more details on EMI Schemes read our Guide here.