The Enterprise Management Incentive (EMI) is a tax-advantaged share option scheme designed for smaller companies.The EMI is a share option scheme that enables companies to attract and retain key staff by rewarding them with equity participation in the business. The scheme is ideal for smaller, entrepreneurial companies that might not be able to match the salaries paid elsewhere.
Done properly, for the right reasons and in the right circumstances we are enthusiastic proponents of EMI but only after making quite sure why it is that you think you want one and ensuring also that the larger issue of incentivising remuneration is dealt with properly. Although a well designed scheme can provide a simple, valuable and tax efficient way of rewarding future success, an inappropriate or badly-implemented scheme can result in serious problems for shareholders and management, and may even damage their relationship with their employees when false expectations are not met.
A company may grant options to selected employees to allow them to acquire its shares over a prescribed period and provided that certain qualifying conditions are met:
- There is no tax charge on the exercise of an EMI option providing it was granted at market value.
- If the company’s share price has increased in value between the time of grant and exercise the uplift is not charged to Income Tax.
- There will be a Capital Gains Tax (CGT) charge when the employee disposes of his shares and proceeds exceed the market value at the date of the grant of the option.
For disposals of EMI shares:
- There is no minimum shareholding requirement in order for shares acquired under an EMI option scheme to qualify for Entrepreneurs' Relief.
- The normal 12 month minimum holding period requirement for Entrepreneurs' Relief is modified and includes the period the option is held, so if the option was held for one year the 12 month holding period is met.
- The effect is that EMI share option holders will, if their options are exercised and they are able to dispose of their shares be on the same footing as shareholders who have held shares for a year.
Tax-advantaged status can be lost if the company:
- Does not set up its EMI within the terms of the legislation.
- Fails to notify HM Revenue & Customs (HMRC) of the grant of an EMI option within 92 days, or
- If a disqualifying event occurs and option holders fail to exercise their options within 90 days.
The directors need to be aware of the type of events that may disqualify a scheme as they will be able to avoid them if they know what to watch out for.