When it was first introduced in 2000, the Enterprise Management Incentive (EMI) scheme had an initial life expectancy of around five years, but arrangements proved to be so popular with employers and employees alike that the scheme is still going strong some twenty years on.
In broad terms, the EMI is a tax-advantaged share option scheme designed for smaller companies who are looking to attract and retain key staff by rewarding them with equity participation in the business. The scheme is particularly popular with smaller, entrepreneurial companies that might not be able to match the salaries paid by larger firms.
A share option is a right to acquire shares in a company, on terms set out in an option agreement. This will specify how many shares an employee may acquire, how much he or she will have to pay for the shares, and when the shares can be acquired through exercise of the option. Option exercise may occur, for example, after a specified period of employment, on achieving prescribed performance targets, or the sale of the company.
EMI is open to companies with gross assets of £30m or less, and with fewer than 250 full time equivalent employees that carry on a qualifying trade. It enables them to offer share options worth up to £250,000 over a three-year period as an incentive. If the shares are bought at the market rate at the time the options were granted, employees pay no income tax or national insurance on the difference between what the shares are worth when acquired compared to the price paid. Capital gains tax will be payable on any gains made when the shares are subsequently disposed of.
David is given an EMI option to acquire a 3% shareholding in his employer’s company for its market value of £10,000. Four years later he exercises the option when the shares are worth £100,000, and eventually sells them for £150,000 when the company is taken over.
David will not pay any tax when the option is granted or when he exercises it. When the shares are sold, David will pay capital gains tax on his gain of £140,000 (£150,000 sale proceeds less £10,000 option exercise price). Ignoring any reliefs he may have available, capital gains tax will be charged at a rate of 10%, so tax of £14,000 will be payable.
Covid-19 and the working time requirement
One of the qualifying criteria for EMIs is that employees and directors need to be engaged to work at least 25 hours per week for their company or group or, if less, for at least 75% of their working time. So a part time employee can qualify by working say two days a week for the company, provided that work elsewhere does not amount to more than 25% of the whole.
Some participants in EMI schemes have been unable to meet the working time requirement because of reasons connected to the Coronavirus pandemic.
HMRC have confirmed that if an employee would otherwise have met the scheme requirements but did not do so for reasons connected to the Coronavirus pandemic, the time which they would have spent on the business of the company will count towards their working time.
HMRC accept the following as reasons for which an employee may have been unable to meet the working time requirements:
In all cases the reason must be attributable to the current Coronavirus pandemic and the period must have begun on or after 19 March 2020.
Employers and employees must keep evidence to show that there is a link to the Coronavirus pandemic.
HMRC have also recently confirmed that EMI schemes will continue to be available after the Brexit transition period ends on 31 December 2020. Previously, EMI schemes were approved under EU state aid rules and in February 2020 HMRC could only confirm that EMI would be recognised until the end of the transition period. However, HMRC have now stated that schemes will operate from 1 January 2021 under UK law.
Partner note: ITEPA 2003, Schedule 5; HMRC Employment Related Securities Bulleting (37): https://www.gov.uk/guidance/employment-related-securities-bulletin-37-october-2020
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