Enterprise Management Incentives (EMI) are just one of a number of tax-advantaged employee share schemes allowing employers to share company ownership with their staff. The EMI scheme is specifically aimed at small and medium-sized enterprises (SMEs), helping SMEs to recruit and retain the key talent that they need to scale up effectively in an otherwise difficult labour market. The policy objective behind EMI is to make the UK one of the best places in the world to start and grow a business, where entrepreneurs feel confident that they can build on their ideas and find success, allowing SMEs across the UK to reach their growth potential.
What is the Enterprise Management Incentives scheme?
The EMI scheme is a tax-beneficial share scheme that can be operated by qualifying independent trading companies, where EMI share options can be granted to selected employees of these companies. If a company has assets of £30 million or less, it may be able to offer its staff share options up to a total value of £250,000 over a 3-year period.
Under an EMI arrangement, an eligible employee will not have to pay Income Tax or National Insurance Contributions (NICs) on the value of their shares, even if the value has increased substantially at the date of exercise, provided they acquire the shares for at least the market value at the date the option is granted. Once the share options have been exercised, there may be Capital Gains Tax (CGT) to pay on any subsequent disposal of the EMI shares, although any uplift in their value will be subject to lower CGT rates in comparison to Income Tax rates.
EMI scheme benefits
When it comes to SMEs, there are market failures that negatively affect growth opportunities. Evidence suggests that SMEs are disadvantaged within the labour market as they struggle to compete with larger firms when recruiting and retaining the talent that they need to scale up and grow as a business, especially at an executive and managerial level. This is often because SMEs will have funding constraints when it comes to being able to offer a competitive level of remuneration for key employees when compared with larger, more established companies.
The EMI scheme is a tax-advantaged employee share scheme that has been specifically created by the government to address this market failure, by bolstering the attractiveness of share-based remuneration that SMEs can offer to employees. This means that cash-constrained small and medium employers can compete with much larger firms to attract and incentivise key employees integral to safeguarding a company’s growth. In this way, employers will be able to offer competitive remuneration packages, helping to support the growth and development of their business, both in terms of employment and performance.
An employee with share options will have an incentive to promote the success of the company and be committed to its future. The EMI scheme is also an effective way for a new company to raise funds and to bolster the remuneration packages of key personnel when still in its infancy.
Who qualifies under the EMI scheme?
Of around 6 million businesses in the UK, the vast majority are small and medium sized, where EMIs are aimed at helping these businesses tackle the everyday obstacles that they face when it comes to recruitment and retention issues. Most SMEs therefore fall within the current qualification limits under the EMI scheme of gross assets of £30 million or less.
The shares over which EMI options are granted must be in a trading company, not an investment company, with a permanent establishment in the UK. The company must also have fewer than 250 full-time employees and carry out a qualifying trade, on a commercial and profit-making basis, which does not include certain excluded trading activities, such as banking, farming, property development, and the provision of legal or accountancy services.
To qualify for EMI, employees must work 25 hours plus a week, or 75% of their working time, where a part-time employee can qualify, provided they do not spend more than 25% of their time employed elsewhere. An employee must also not hold more than 30% of the company.
How does the EMI scheme work?
As a discretionary scheme, share options under EMI can be offered to employees at the discretion of the company. This means that any employee meeting the basic qualifying conditions may be granted tax-advantaged EMI share options for shares with a market value of up to £250,000, at the date of grant, in a 3-year period. However, the total value of unexercised share options a company may grant cannot exceed £3 million.
Within these individual and company limits, EMIs will provide generous tax advantages to both qualifying companies and participants. If EMI share options are granted to an employee at market value, the employee will pay no Income Tax or NICs on any increase in share value between the date the options were granted and the date that they were exercised. Once options have been exercised, capital gains arising from disposal of the shares may be subject to CGT, although this is still much lower in comparison to Income Tax rates. Employees may also be eligible for a reduced CGT rate through Business Asset Disposal Relief (BADR).
An employee will be eligible for BADR if there is a period of 2 years between the date an option was granted to the employee and the disposal date of the shares. Where eligible, BADR means that an employee will pay tax at 10%, compared to the standard 20% CGT rate.
Upon exercise of EMI options, a company may receive a Corporation Tax deduction for the gain that the employee makes at that point. The employer will also benefit from not paying NICs.
What is an EMI share option?
An EMI share option is simply the right to acquire shares in a company, rather than an immediate share acquisition. As a share option plan, EMI offers selected employees the opportunity to purchase shares at a price agreed at the time the options are granted.
An EMI share option can be granted with any exercise price, and with any other conditions. Individual performance and retention conditions are often built into EMI, helping to ensure that rewards are only distributed when key corporate objectives have been met. However, employees must be able to exercise their share options within 10 years. To maximise tax breaks, EMI share options should also be granted with an exercise price set at market value, and shares should not be sold until at least 2 years after the date the option is granted.
How to implement an EMI scheme
To be able to secure the relevant tax reliefs, a company must notify HMRC about a grant of EMI share options by submitting an online EMI notification within 92 days of the date of the grant.
The company must also first register its EMI scheme before it can submit an EMI notification. A reference number should be received within 7 days of registering the scheme. HMRC can then be told about the grant of an EMI share option. All new tax-advantaged schemes should be registered by 6 July following the tax year the scheme was established, and will require an employment related securities (ERS) return to be filed with HMRC on an annual basis.
To notify HMRC of the grant of a share option, the employer will need the Government Gateway user ID and password used when HMRC was told about the EMI scheme. If the company grants EMI options to 30 or more employees on the same day, it will also need to download and complete the EMI notification template at GOV.UK and upload the completed template using the same user ID and password. Confirmation will be sent by HMRC that the EMI notification has been received, which must be retained in the employer’s records.
When notifying HMRC of the grant of EMI share options, this must include:
- the number of shares over which the option was granted, stating the total number of shares each employee was awarded
- the exercise price per share, entering the price the employee will pay per share in pounds sterling up to 4 decimal places
- the actual market value, where this is the market value of a share after taking into account any restrictions or the risk of forfeiture as set out in the company’s articles of association
- the total unrestricted market value at date of the grant of employee’s unexercised options, including any Company Share Option Plan (CSOP) options in addition to their EMI options
There is a £250,000 individual limit on holding options over shares, where options under any CSOP operated by the company count towards this limit. Share options granted to an employee over the £250,000 limit will not be qualifying options, attracting the relevant tax reliefs, and the company would instead need to register for a non-tax advantaged scheme.
How does the EMI scheme compare to other schemes?
Employee share ownership schemes enable employees to acquire and hold shares, either directly or indirectly, in the company that they work for, where research suggests that these type of schemes have several benefits, for both the employer and employee alike. They allow employees to have a stake in the company that employs them, and allow employers to help motivate and incentivise employees by sharing the financial rewards of positive performance.
The government offers four tax-advantaged employee share schemes: the EMI scheme, Company Share Option Plans (CSOP), Share Incentive Plans (SIP) and Save As You Earn (SAYE). EMI and CSOP are both discretionary schemes, while SIP and SAYE are all-employee schemes. The EMI and CSOP schemes are popular options if employers want to operate their share option arrangements flexibly, providing an element of choice in key areas, such as who gets to benefit, the level of awards and how to treat leavers. In contrast, under all-employee schemes, shares must be offered to all employees on a broadly equal basis.
While these schemes differ in their design and targeting, in broad terms, they are all aimed at promoting employee share ownership by offering a range of tax advantages on shares options or issued shares. The conditions for tax relief vary by scheme, although each of them allows employees to benefit from reliefs on either Income Tax, NI and/or Capital Gains Tax. In addition, an employer operating the schemes may qualify for Corporation Tax relief.
In the context of EMI, this allows SMEs to offer tax advantages on the exercise of qualifying share options offered to employees as a form of remuneration. The scheme aims to produce a range of outcomes including helping SMEs compete with larger firms to recruit high-skilled employees and retain key members of staff. By helping companies to attract and retain top talent, the scheme has helped to support the growth and development of hundreds of SME’s.
However, there are limits to the EMI scheme, where high-growth companies may become ineligible to offer share options because they have outgrown its qualification limits on employee numbers or capital assets. Following a 2021 review to determine whether EMI is fulfilling its policy objectives of helping SMEs recruit and retain employees, and if more companies should be able to access the scheme, the government announced in its 2022 Spring Statement that the scheme remains appropriately targeted and will not be expanded.
Still, while it appears unlikely that any changes will be made to which companies can qualify, or to the financial limits that apply to EMI options, the government also announced that the tax-advantaged CSOP regime will now be reviewed to consider whether it should be reformed and expanded to support companies as they grow beyond the scope of EMI. The CSOP currently provides selected employees with the option to buy shares with a maximum value of £30,000 at the date of grant. In due course, it is therefore possible that CSOP could be used to provide similar benefits for retention and recruitment as EMI for high-growth companies.
EMI Scheme FAQs
[wp-faq-schema accordion=1]
Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
