The Enterprise Management Incentive (EMI) scheme is a tax-beneficial options arrangement used for attracting and retaining key employees, while protecting owner-managers from over dilution. EMI is a popular option for business owners because of the generous tax reliefs available and the limited upfront cost to the business. Here we provide our top tips for employers considering EMI.
Business owners and/or shareholders should have a clear personnel and commercial rationale for putting the scheme in place and to understand what the right mechanism is for achieving those aims. For example, an EMI scheme works best in circumstances when the value of the business is set to increase notably so option holders can see that there is or will be sufficient value available to them at some point in the future. If this isn't the case, then the lack of perceived benefits and the tax reliefs may not prove effective and there may be another way to attract or incentivise them in a way that make more commercial sense for the business e.g., bonuses.
EMI is one of the more flexible incentive schemes but there are a number of criteria that must be understood and met in order for the company and its employees to be eligible to benefit. If a clear, commercial rationale for the scheme exists, then the next step is to ensure that the criteria are properly understood and that the company can meet them. Generally speaking, EMI is available to most businesses except those that HMRC deems as 'excluded trades' and those exceeding the size requirement i.e., businesses with more than 250 employees. Some capital and ownership structures e.g., venture-backed businesses and joint ventures, require closer consideration to ensure they don't impact on your ability to qualify. If you are unsure of whether your business meets the criteria, consider speaking with your tax advisor or contact us.
Time and seeking advice
Planning, designing and implementing an EMI scheme can take considerable time, particularly if clearance is being sought with HMRC to ensure the company will qualify. Therefore, allowing for sufficient time to agree the beneficiaries, terms, valuation, pricing and granting of options is vital. Having quality tax and corporate finance advisors can be extremely valuable in both saving management's time and ensuring that the scheme is designed appropriately and in-keeping with the business' wider growth strategy. It can also be useful to involve an employment lawyer in the design of an EMI scheme, particularly when implementing them for key members of the team, as they can ensure that the scheme does not interfere with any other parts of their employment contract and/or director's service agreement (if applicable).
In order to appropriately price the share options, a valuation will need to be conducted, calculating both the Unrestricted Market Value (the capital gains tax value at the time of grant ignoring restrictions) and the Actual Market Value (the capital gains tax value at the time of grant taking account of restrictions) of the share options to be granted. Share valuations have to be agreed with HMRC in advance of EMI options being granted, this can typically take between 2-4 weeks. Again, the timing of the valuation is important because once agreed with HMRC, they will usually set a 90-day granting period, during which the agreed valuation remains valid.
An EMI scheme can be an extremely valuable mechanism for employers to use in order to incentivise their employees, giving them a stake in the growth upside and access to very generous tax reliefs, without management over compromising on dilution. Its popularity is understandable yet the detail for each situation still needs to be understood and appropriately planned for.
The EMI scheme is currently under review by the Chancellor, following a 'call for evidence' in the March 2021 budget which will take place over the next few months. The deadline for responses is 26 May 2021 and is to consider whether the scheme should be expanded to include more companies. Therefore, we do not expect that the scheme will change in any way that would have a detrimental impact on those currently qualifying.
Originally published 26 March 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.