Enterprise Management Incentive Scheme (“EMI”) Print
This share option scheme is the most tax efficient scheme currently available. The scheme is directed at small companies which carry out qualifying trading activities, and is designed to assist these companies to recruit and retain high calibre key staff by allowing the companies to grant tax-advantaged options over shares worth up to
£250,000 at the time of grant, to each employee, provided that he is employed for a minimum of 25 hours per week, or if less for at least 75% of his working time. In order that many employees are not adversely affected by being furloughed, working reduced hours or taking unpaid leave as a result of the coronavirus pandemic, the working time requirement has been relaxed. Initially this covered existing options as at 19 March 2020, and new options granted after that date. The relaxation was originally intended to expire on 5 April 2021, but in the Budget on 4 March 2021 this has been extended for a further year, and is now set to end on 5 April 2022. As a result of this relaxation, individuals whose working time has been affected by coronavirus will retain access to the EMI scheme’s tax advantages.
Employees who control more than 30% of the company’s ordinary share capital are excluded from participating in the scheme.
The scheme is available to both quoted and unquoted trading companies which broadly satisfy the Enterprise Investment Scheme requirements with regard to trading activities. At the time the options are granted the company’s gross assets must not exceed £30,000,000 and it must have less than 250 full-time employees. The company must not be a 51% subsidiary of another company, and if it has subsidiaries, each subsidiary must:
Be at least a 51% subsidiary of the company
Be a qualifying subsidiary.
Companies involved in shipbuilding, coal or steel production do not qualify under the EMI scheme.
The company granting EMI options is not required to operate wholly or mainly in the UK, but it must have a permanent establishment in the UK. By having a UK permanent establishment, the company will come within the UK corporation tax net in respect of any UK branch profits it derives. It should be noted that a UK subsidiary of an overseas company would not on its own be a permanent establishment, and that the company granting the EMI options is itself required to carry out the trading activities in the UK.
The main advantages of the scheme are:
Any number of employees may each be given options over shares worth up to £250,000 at the time of grant, subject to an overriding limit that restricts the maximum value of options granted under the scheme to £3,000,000 at any given time.
An employee may be granted additional EMI options over a period of time, but to the extent that the last option exceeds the upper limit of £250,000 it will not be a qualifying option.
Prior to 16 June 2012 the maximum value of qualifying options that an individual employee could receive was £120,000. In the event that options granted before 16 June 2012 exceeded the £120,000 limit, the excess options do not come within the increased limit for options granted after 15 June 2012.
Where options have been granted to an employee on more than one occasion the value of each option is taken at the time it was granted and the total values are aggregated. If an employee has been granted options with a value of £250,000, irrespective of whether these options have been exercised, he cannot be granted further qualifying options for a minimum period of 3 years from the date the last qualifying option was granted.
No income tax liability or NIC arises:
On grant of the options.
When the options are exercised, provided they are exercised within 10 years of the date of the grant and the option was granted at not less than the market value of the shares.
When the options are exercised within the 90 day time limit allowed following a “disqualifying event” and the option was granted at not less than the market value of the shares.
A disqualifying event includes any of the following occurrences:
The company which issues the EMI option:
Becomes a 51% subsidiary or under the control of another company, although the acquiring company may be able to grant replacement options if it is a qualifying company;
No longer meets the trading activities requirement;
When the employee ceases to be an employee of the company, or no longer satisfies the working time requirement.
The working time requirement is being relaxed where employees are furloughed, working reduced hours or taking unpaid leave due to coronavirus this time limited exemption was due to expire on 5 April 2021, but is now being extended until 5 April 2022. This measure was introduced to ensure that option holders do not have to exercise their options earlier than planned, and also allows employers to grant new options during coronavirus.
If an option is granted at a price below market value at the time of grant, an income tax liability, and possibly a charge to NIC will arise when the option is exercised. The amount chargeable to tax is the difference between the exercise price plus any sum paid for the option, itself, and the lower of:
The market value of the shares at the date of grant, or
The market value of the shares at the date the option is exercised.
If following the exercise of an EMI option the shares are sold, Capital Gains Tax (“CGT”) will be chargeable on the difference between the sale proceeds and the base cost of the shares to the employee. Business Asset Disposal Relief (“BADR”) will be due if:
The option was granted not less than 1 year before the date of disposal;
The shares were acquired by the employee on or after 6 April 2013 as the result of the exercise of a qualifying option, or qualifying replacement option, and;
Throughout the period of 2 years prior to disposal, the individual was an employee or officer of the company. This time limit used to be 1 year for disposals before 6 April 2019, but was increased in the Budget on 29 October 2018.
If the EMI options were exercised before 6 April 2013, then BADR will only be available if the employee holds more than 5% of the share capital and voting rights.
The base cost to the employee will normally be equal to the market value of the shares at the date the option is granted.
Where BADR is not due, for 2021/22 CGT is charged at 10% or 20%. Where the individual’s taxable income, after deducting the personal allowance and any other reliefs, is less than the basic rate band threshold of £37,700 for 2021/22 then gains of an amount equal to the difference between the individual’s taxable income, and the basic rate band threshold are taxed at 10%. Gains in excess of this amount are taxed at 20%.
Although an income tax charge arises on exercise where EMI options are granted at below market value, this is still an efficient way for the employee to acquire the shares, particularly if the company does not require the subscription funds for its business. The tax cost to the employee would be less than the amount he would otherwise have to subscribe for the shares. The difference is that instead of subscribing 100% of the cost to the company for the shares, he pays a nominal amount for the shares, plus income tax at his marginal rate, on the difference between the market value of the shares at the date the options were granted, and the actual amount he pays for them. If, however, it is felt that the company will require the subscription funds for its business, then the employee should be granted the options at market value.
Where shares are acquired at below market value they normally attract a tax charge on the amount of the discount, which is treated as a beneficial loan for tax purposes. Shares granted at below their market value under an EMI option are exempt from this charge.
Where options are granted below market value, there may also be a charge to NIC on exercise where the shares acquired are Readily Convertible Assets (“RCAs”). Broadly a share is an RCA if there is a market for those shares. For instance, the shares would be RCAs if they are listed on an exchange, or advanced negotiations are in place for the sale of the grantor company. In addition, if the grantor company is not entitled to a corporation tax deduction on the exercise of the option, then the shares will be treated as RCAs. The NIC charge does not apply where the options are granted at market value as no taxable benefit arises.
Where options are granted below market value, the option deed may state that the employee will be required to pay the employer’s NIC (13.8% of the taxable benefit).
Where the employer requires the employee to pay the employer’s NIC, the employee is entitled to tax relief on the amount he reimburses to the employer, and the tax payable on the benefit is calculated as follows:
On 3 October 2014 Angela was granted EMI options over 10,000 shares (1% of the company) in ABC Ltd at an option price of £1 per share, when the agreed market value was £6.50 per share. The option document requires Angela to pay the employer’s NIC. On 10 January 2022, ABC Ltd is sold for cash. Immediately prior to the sale, Angela exercises her EMI options, and receives cash consideration of £250,000 for her shares. Angela is a 45% taxpayer.
|Value of shares on date of grant||65,000|
|Less amount paid for the shares||(10,000)|
|Employer’s Nic @ 13.8%||7,590|
|Tax thereon @ 45%||21,334|
|Add Employee’s Nic (£55,000 @ 2%)||1,100|
|Tax and Nic payable by Angela||30,024|
Although Angela has to bear the cost of the employer’s NIC, she is still better off by £24,976 than if she had to pay the full market value of £65,000 for the shares.
Continuing with this example, Angela’s CGT liability on the sale of the shares is as follows (assuming she has not used her BADR lifetime allowance of £1m; has made no other CGT disposals during the year, and has no CGT losses available from prior years):
|Less Cost of shares||(10,000)|
|Market value adjustment||55,000|
|Less Annual Exemption||(12,300)|
|CGT thereon @ 10%||17,270|
This leaves Angela with net proceeds of £192,706 after taking into account the amount she has to subscribe for the shares, and all taxes. As Angela has held the options for more than 2 years she is entitled to BADR so is liable to CGT at 10%.
In the case of EMI options granted by unquoted companies it is normally advisable to agree the value of the shares with HM Revenue & Customs Assets & Valuation department in advance of granting the options. Once the value has been agreed, HMRC normally allow a period of up to 90 days for options to be granted at the agreed value.
Thereafter, it may be necessary to obtain a fresh agreement of the value of the shares.
It is also necessary for the company to notify HMRC that an EMI option has been granted within 92 days of the grant, otherwise the option will not qualify for this beneficial treatment. Notification of the grant of EMI options must be made online using the Employment Related Securities Online Service.
The company is also required to file an Annual Return to HM Revenue & Customs showing the status of the options granted.
Usually both the employer and employee should make a joint election under Section 431 ITEPA 2003 to ignore any restrictions that may apply to the option shares, so that the shares are treated as being acquired at their unrestricted market value. This is to ensure that a further benefit in kind does not arise at the time the restriction is removed. The election must be signed by both the employer and employee within 14 days of the exercise of the option.
Companies are entitled to corporation tax relief in respect of the value of options granted to employees, whether under the EMI scheme, or other options, and in most instances must account for the value of unexercised options as a debit to their profit and loss account as part of the cost of employment.