View the related Tax Guidance about EMI scheme
Setting up and administering EMI schemes
Setting up and administering EMI schemesWhen compared with other tax-advantaged employee share schemes, Enterprise Management Incentive (EMI) has historically been relatively simpler both to set up and administer. This follows the principle that it is meant to be an inclusive scheme for smaller companies and therefore does not attempt to discourage those that might be tempted to try it out. FA 2014 removed the formal approval process from all of the tax-advantaged schemes, instead moving toward a system of self-certification. This means that the benefits of simple set-up requirements which have long been enjoyed by EMI schemes are now enjoyed by the other schemes (SIPs, CSOPs and SAYE).The several different stages of the process that do not necessarily need to be operated in a strict linear order are the following:•establishing that the company / group qualifies•devising and structuring the plan•agreeing a share valuation•drawing up option agreements or scheme rules and agreements•presenting the scheme to staff•notifying HMRC electronically•monitoring the scheme and completing annual returns electronicallyEstablishing that the company / group qualifiesInevitably, the first step is to decide on whether EMI is even a possibility. If the company is too large, carries on the wrong trade or the individuals that the company would like to include are not eligible, then an EMI scheme is not appropriate. See the EMI schemes ― qualifying conditions for companies guidance note.Devising and structuring the planCompanies need to plan carefully in advance before implementing an EMI scheme. They should
EMI schemes ― employee tax consequences
EMI schemes ― employee tax consequencesThe tax rules around enterprise management incentive (EMI) schemes are extremely generous and were introduced to enable small higher risk trading companies to recruit or retain key employees. The principal advantage is that where the option price is not less than the market value of the option shares at the time of grant, no income tax charge arises when the option is exercised. Therefore, if there is substantial growth in value of the shares between grant and exercise, that growth is liable only to CGT when the shares are sold. By contrast, if the option is non-qualifying, an income tax charge arises on exercise based on the market value of the shares at that time. CGT Business Asset Disposal Relief (formerly Entrepreneur’s Relief) is usually available for disposals of EMI shares and so the rate of CGT is reduced to only 10%, making the scheme even more attractive. This note considers the rules on a step-by-step basis.Grant of optionThere is no income tax or NIC charge arising on the granting of an EMI option. Vesting of optionThere is no income tax or NIC charge arising when an EMI option vests, ie becomes available for exercise or vests automatically, eg after a specified period.Exercise of optionThis is the critical point from a tax perspective. There are two different possibilities.If the option is granted with an exercise price equal to or higher than the actual market value (AMV) at the date of grant, there are, as
Why use an enterprise management incentive (EMI) scheme?
Why use an enterprise management incentive (EMI) scheme?The legislation, primarily in ITEPA 2003, Sch 7, gives employers a strong clue as to the intended benefits of enterprise management incentives (EMI) schemes. It suggests that they should be used to recruit and retain members of staff.When the legislation was originally introduced in 2000, the belief was that small, fast growing companies, particularly in the IT sector, would need a boost to assist in the retention of staff in a highly competitive market.Many start-ups struggle to pay market rates and are therefore constantly at risk of losing the employees that they need to develop. As a result, EMI were introduced to help small companies. Today, most smaller companies are able to benefit from EMI and if they are able to do so, almost certainly should take advantage.A good source of further information is at ETASSUM50000.Note that although state aid approval for EMI schemes expired on 6 April 2018 and was only renewed by the European Commission on 15 May 2018, EMI options granted in the intervening period are treated as qualifying EMI options. The European Commission originally extended state aid approval for EMI schemes until 2023. Although the EU state aid rules no longer apply to UK law with effect from 31 December 2020 (the end of the transition period), a similar system will be set up in the UK under the level playing field terms agreed in the Trade and Cooperation Agreement. HMRC confirmed in October 2020 that EMI schemes
EMI schemes ― qualifying conditions for companies
EMI schemes ― qualifying conditions for companiesIntroductionIn order to qualify for the tax breaks that enterprise management incentives (EMI) bring, companies have to meet a number of requirements.The legislation for qualifying companies is covered in ITEPA 2003, Sch 5, paras 8–23.For more on the reasons for using EMI schemes, see the Why use an enterprise management incentive (EMI) scheme? guidance note.The requirements broadly fall into three categories:•the size of the company / group and its structure•the terms of the option•the nature of the company / group’s tradeHMRC guidance on qualifying companies is at ETASSUM52010 onwards.Size and structureIndependenceIn order to qualify, the company whose shares are being granted must not be a 51% subsidiary of any other company. Care must be taken to go beyond merely ensuring that current shareholdings meet this rule. When determining the shares that a company holds, it is necessary to look at not only their own shares but also those of associates (a concept which is extremely widely defined and includes family members, trusts and other companies). ETASSUM52040 indicates that share ownership, voting power, or control over income or assets must each be considered for this ‘control’ test. In addition, it is necessary to look at any rights or arrangements that exist which might enable a company to acquire more shares, eg options. Effective control, even where shareholdings do not immediately add up to more than 50%, also prevents a group using EMI. As such, particular care needs to be taken whether
Undertaking an employment-related securities due diligence exercise
Undertaking an employment-related securities due diligence exerciseIntroductionThe overall goal of the due diligence (DD) exercise is to assess what employment-related securities (ERS) and share schemes activity has occurred within the company (or corporate group), any resultant company liabilities, and where appropriate, quantify those risks and recommend mitigation appropriate to the client.For example, a review of an EMI scheme could uncover an employee who has exceeded the £250,000 limit, and so some options will be treated as non-tax-advantaged, and an option granted to another employee at a discount to market value, meaning some of the eventual option gain is likely to be subject to income tax via PAYE, with NIC also applying.For further example, a review of ERS shows shares acquired by a company director are restricted securities and no section 431 election has been entered into. A proportion of the disposal proceeds may therefore be subject to income tax via PAYE, with NIC also applying.The DD project will generally be referred to verbally and in correspondence by an agreed project name rather than the purchaser / target / vendor company name for confidentiality reasons.FieldworkThe DD engagement terms should agree on the initial steps between the client, target company (where not the client organisation) and DD project team.Where the first step is a conference call between the various parties to assess what ERS and share schemes activity has taken place at the target company, a tailored information request document can be prepared by the DD project team. Where the first
Enterprise management incentive schemes
Enterprise management incentive schemesWhat is an enterprise management incentive (EMI) scheme?The enterprise management incentive (EMI) scheme is a tax-advantaged share option employee incentive scheme aimed at small entrepreneurial companies that meet certain conditions. It is designed to assist such companies in recruiting and retaining high quality employees.The scheme offers attractive opportunities for equity participation by employees in recognition of the fact that smaller companies may not be able to match salary levels paid elsewhere. The EMI scheme is also flexible enough to allow for the options to be geared to future capital growth and performance targets. So long as the options remain qualifying for EMI status throughout the period of ownership, the employee should be able to take advantage of income tax and national insurance reliefs.Note that although state aid approval for EMI schemes expired on 6 April 2018 and was only renewed by the European Commission on 15 May 2018, EMI options granted in the intervening period are treated as qualifying EMI options. The European Commission originally extended state aid approval for EMI schemes until 2023. Although the EU state aid rules no longer apply to UK law with effect from 31 December 2020 (the end of the transition period), a similar system known as subsidy control has been set up in the UK under the level playing field terms agreed in the Trade and Cooperation Agreement. HMRC confirmed in October 2020 that EMI schemes continue to be available under UK law from 31 December 2020 onwards. EMI
Coronavirus job retention scheme reviews
Coronavirus job retention scheme reviewsBackground to the Coronavirus Job Retention Scheme (CJRS)The coronavirus (COVID-19) pandemic produced a number of emergency measures for employers to recognise. However without doubt, the most important was the Coronavirus Job Retention Scheme (CJRS) which provided significant Government support, seeking to ensure that employers could continue to make payments to employees who had to be furloughed. It was important to recognise that much of the CJRS qualification criteria was based on cliff-edge tests ie where the employer either did or did not qualify for CJRS support, depending on the precise facts relating to each employee (no ‘bending’ of the rules was intended to be possible). Most employer claims were processed by HMRC quickly on a ‘pay now check later’ basis. This guidance note focusses on the compliance activities undertaken by HMRC, ie where the department has subsequently reviewed, and challenged retrospectively, employers’ CJRS claims.Simon’s Taxes A8.201–A8.204 provides further detailed guidance on how the CJRS operated. The GOV.UK site may also be provide historical reference material, including Claim for wages through the Coronavirus Job Retention Scheme. The Employment allowance guidance note also provides details of the interaction between CJRS reclaims and the employment allowance.Other ad hoc employer relaxations by the Government, arising from the COVID-19 pandemic, are referred to elsewhere. Examples of other matters referenced are in the Homeworking, Save as you earn (SAYE) schemes ― an overview, EMI schemes ― qualifying conditions for employees, Optional remuneration arrangements, Holiday pay ― legal points, Sick pay ―
EMI schemes ― qualifying conditions for employees
EMI schemes ― qualifying conditions for employeesThe enterprise management incentive (EMI) scheme is a tax-advantaged share option employee incentive scheme aimed at small entrepreneurial companies that meet certain conditions. It is designed to assist such companies in recruiting and retaining high quality employees.As the EMI scheme is attractive, there are conditions that must be met by the company as well as the employees. For the conditions that must be met by the company, see the EMI schemes ― qualifying conditions for companies guidance note.This guidance note considers the conditions that must be met by the employees.In order to be an eligible employee, there are three different types of condition that have to be met. These relate to:•employment status•working time•material interestThese are considered below.Employment statusThis requirement defines an eligible employee as somebody who is working either for the company running the plan or any one of its qualifying subsidiaries. This means that EMI cannot be used to reward self-employed consultants, unless they become employees.However, consultants may offer services to a number of companies in start-up mode without wishing to work exclusively for a single one.Working timeUnder the EMI legislation, which differs from that for some of the other tax-advantaged schemes, it is necessary for an employee’s ‘committed time’ to meet one of the two criteria. Either individuals must work for at least 25 hours a week or, if less, 75% of their total ‘working time’ (as defined in ITEPA 2003, Sch 5, para 27). It is relatively
Underwater options
Underwater optionsWhat are they?An option becomes an underwater option if the current price of the shares under option has fallen below the price payable on the exercise of the option. Underwater options cause concerns when there is no reasonable prospect of share price recovery in the short or medium term, eg two to five years.When do underwater options appear?Underwater options commonly arise if after an option is granted:•there is a bear market where share prices fall generally•specific events affect a particular sector, eg bank shares in the early stages of the 2008 financial crisis, or in the aftermath of the EU referendum on 23 June 2016, when the FTSE 250 index dropped sharply, although it later recovered•there is war or a natural or other disaster, eg oil companies shares after a major oil spill•there is lack of confidence in a particular company or its management, eg following highly publicised criticism of Board membersWhy is this a problem?For the option holder, the option has no value and there is no financial incentive or reward.For the employer, if underwater options do not incentivise employees, or have a demotivating effect, staff performance and retention may be affected. Employees can move job without losing valuable options and may seek better rewards elsewhere. Plan limits can prevent the employer granting further options.For the shareholders, they will also have suffered as a result of the share price decline. They may not want employees and directors to have a special advantage by
Exclusions from the disguised remuneration rules
Exclusions from the disguised remuneration rulesThis note covers the main exclusions available against the application of the disguised remuneration legislation.Exclusions for share schemesThere are specific exemptions in the legislation for arrangements that support common types of employees’ share schemes. It is important to ensure that each step in the process is covered by a separate exclusion, as HMRC will treat the setting aside of assets (earmarking), and the grant of options or awards as distinct steps for the purposes of the rules. The statutory exemptions overlap, and in some cases are subject to certain terms and conditions.Tax-advantaged share schemesTax-advantaged schemes benefit from the widest set of exclusions covering the following relevant steps:•those taken under HMRC tax-advantaged share schemes, share incentive plans (SIPs), SAYE and CSOP, including the grant of options / awards, and the acquisition and delivery of shares to satisfy them•those taken solely for the purposes of acquiring shares to be awarded under SIP, SAYE and CSOP, provided the total number of shares held for the relevant purpose do not exceed the maximum number of shares which might ‘reasonably be expected to be required’ for those purposes over a 10-year period•those involving the grant of qualifying EMI options, the acquisition, holding, and provision of shares for the purposes of an EMI scheme, provided there is no tax avoidance motive and the total number of shares held do not exceed the maximum number which might ‘reasonably be expected’ to be required over a 10-year periodEIM45315As a
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