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A guide to Enterprise Management Incentive (EMI) schemes

Profile picture of Kate Moss-Robins.

Senior Content Writer

Last Updated: | 12 min read
Last updated: 14 Sep 2024

Enterprise Management Incentive (EMI) schemes are government-backed share option schemes for employees. They allow small, private companies to offer their staff equity in the business, which can bring considerable tax benefits for both parties.

Small business owners looking to grow, retain, and incentivise their teams could benefit from granting EMI options. In this blog, we explain what these are, how they work, and how to set them up.

What are Enterprise Management Incentive schemes and how do they work?

EMI schemes are generally the most tax-advantaged way for qualifying companies to give employees an option to purchase shares at a later date. They are backed by the UK government and specifically designed for high-growth small businesses and start-ups, helping them attract top talent, promote staff loyalty, and expand rapidly, all without a significant layout of cash.

Enterprise Management Incentive schemes give employees the option to buy shares in the company at some point in the future. Employees do not have to buy the shares; but if they do, they can purchase them at today’s price, even if their value has increased by the time they are bought.

This is because when EMI share options are granted, an exercise price is set. This is the price to be paid for the shares when they are purchased. To be tax efficient, this exercise price must be no less than the actual market value of the shares at the time the options are granted. To ensure that this is the case, the actual market value must be agreed upon with HMRC, with options then issued within 120 days of this agreed valuation.

Subject to the overall company cap of £3 million, you may grant each qualifying employee EMI share options worth up to a total unrestricted market value of £250,000 (although any CSOP options the employee has will also count towards this). Where the full £250,000 worth of options have been granted, the employee cannot be granted any further EMI options until 3 years have passed from the date the last of the options were granted.

So, what’s in it for the company?

As well as being a cash-efficient way to bring in and retain top talent when the company is starting out and needs to conserve cash, (as opposed to paying extremely high salaries or awarding top bonuses), there are also tax benefits which the company can take advantage of. There is a potential for Corporation Tax Relief when the shares are acquired by the employee upon exercise of the option, and there is also an opportunity for the company to elect to pass on the payment of any employer’s National Insurance contributions to the employee who is granted the option.

EMI schemes are also typically used to incentivise employee loyalty, reducing turnover and recruitment costs for the company. This is most commonly achieved using two mechanisms:

  1. Drafting the rules of the EMI scheme such that options can only be exercised after a certain period, or when there is an exit – i.e. the company is sold or undertakes an initial public offering.
  2. The use of time-based vesting, where employees must “earn” the right to the option by staying at the company. For example, an employee might not be entitled to any options in their first year, but after the first year, they start to accrue monthly.

In addition, EMI options can only be exercised by those who are currently employees, or those who were employees so long as they exercise the options within 90 days of leaving the company. This is an added incentive to stay at the company, because if an employee leaves and wants to take advantage of the tax benefits of an EMI option, they will be forced to exercise their options and purchase the shares within this period.

Taxation on Enterprise Management Incentive schemes

There is no tax payable on the grant of an EMI option.

Suppose the EMI options are granted with an exercise price at least equal to the actual market value of the shares at the date of the grant. In that case, the employee will pay no income tax or National Insurance contributions when the option is exercised.

As long as shares have been held for at least two years, employees may be entitled to Business Asset Disposal Relief when they sell the shares they have purchased by exercising the option. This means that they pay a reduced Capital Gains Tax (CGT) rate of 10% when they sell their shares, as opposed to the standard rates.

Employers may benefit from Corporation Tax (CT) relief when the options are exercised. The relief matches the difference between the actual market value on the date that they are exercised and the amount the employee pays for them.

Bear in mind that all tax benefits are subject to individual circumstances and the EMI qualifying conditions, which we go into next.

Qualifying conditions for companies

To be a “qualifying company” for EMI purposes, HMRC sets out the following criteria for companies:

1. Independence

Your company must not be a 51% subsidiary. In other words, it must be independent (not controlled or owned by another person or company).

2. Qualifying subsidiaries

If you have one or more subsidiaries (including dormant companies), they must all be qualifying companies for the company that intends to grant the EMI options to be eligible. This means that the company must own more than 50% of each subsidiary’s share capital, and all companies must carry out a qualifying trade (see point 5 below).

There must also be no provisions in place that could result in another person or corporate entity taking control of the company subject to the Enterprise Management Incentive scheme.

3. Gross assets

The gross value of your company’s assets must not exceed £30 million on the date the EMI option is granted. If you have any subsidiaries, this is a total limit that applies to the group as a whole.

4. Number of employees

You must employ no more than 250 full-time equivalent employees to qualify for an Enterprise Management Incentive scheme. A full-time employee is someone who works at least 35 hours in a standard five-day working week (excluding lunch breaks and overtime).

If you have subsidiaries, again, this limit applies to the group as a whole. The only exclusions that apply to this part of the criteria are students on vocational training, and staff members who are on parental leave when the EMI options are granted.

5. Excluded trading activities

Your company must not operate substantially in an excluded industry. These include banking, farming, legal or accountancy, property development, and ship-building services. You can find the full list of excluded trading activities in the HMRC internal manual. There are no set rules to what is regarded as “substantial”, although this is generally perceived to be around 20% of the group’s trade.

6. Fixed UK establishment

Your company must be based in the UK. This means that it must have a fixed place of business (such as an office, workshop, or factory) where it wholly or partly carries out its business activities, or has an agent who habitually acts on the company’s behalf.

7. Maximum EMI limit

A company can have up to a maximum of £3 million worth of unexercised EMI share options at any one time. The unrestricted market value is used to calculate this, and along with the actual market value, will be agreed with HMRC at the outset. Any options granted over this limit will not attract Enterprise Management Incentive scheme tax relief.

Please note that the above is a brief introduction, and in practice, the requirements can become complex to navigate. If you’re unsure if your business qualifies to put an Enterprise Management Incentive scheme in place, you can submit an advanced assurance application to HMRC.

HMRC will review your company information and let you know if you’re eligible. More information on how to make this application can be found in the HMRC internal manual.

Qualifying criteria for employees

Below is a summary of the conditions that employees need to satisfy to be eligible to be granted EMI options:

  • They must be legally employed by your company or a qualifying subsidiary company
  • They must be a UK tax resident
  • They must work at least 25 hours a week (or 75% of their weekly working time)
  • They must not hold or be entitled to more than 30% of company shares (known as material interest)
  • The total unrestricted market value of all CSOP and EMI options held by them must not exceed £250,000

Disqualifying events

A disqualifying event is an event which disqualifies an option from EMI tax relief, and includes circumstances such as an employee leaving their employment or working part-time, certain changes to the terms of the option, or the company becoming substantially involved in an excluded trade, for example. A full list of disqualifying options that may affect your company can be found here.

Where a disqualifying event occurs, both the company and the relevant employee(s) will still be entitled to the EMI tax advantages, as long as their options are exercised within 90 days of the disqualifying event.

If your company and the employees you wish to offer share options to meet the above requirements, keep reading to find out how to set up an EMI scheme.

How to set up an EMI scheme

Once it is established that the company and employees are eligible, you can go ahead and set up your Enterprise Management Incentive scheme.

The first step is gaining approval from the Board of Directors and any relevant shareholders or governing bodies to put in place your employee share option pool. This means checking your articles of association and any shareholders’ agreement, to see if there are any restrictions on doing so, and if any special consents are required.

Next, you will need to apply for an EMI valuation with HMRC using a VAL231 form. This will set the actual market value and unrestricted market value of each share, which you will then use to set the exercise price of the options, and calculate whether you have surpassed the maximum company or individual option limits. Your valuation is valid for 90 days from the date of the agreement letter from HMRC.

Whilst waiting for your valuation to be agreed by HMRC, you can begin drafting the EMI scheme documentation, which will include the scheme’s rules and individual option agreements. All relevant parties (the Board of Directors and potentially shareholders and others, depending on who you have identified above) will need to approve the setting up of the scheme, the grants in general, and the scheme documents themselves, as they will set out how the scheme will work, the number of share options being granted to each employee, and any restrictions or special conditions relevant to the options (e.g. time or performance-based vesting).

After receiving the required approval, and once you have received agreement of the EMI valuation from HMRC, you may grant EMI options to employees by entering into the individual option agreements.

The final step is to tell HMRC about your EMI scheme and register the EMI options. If the options were granted before 6 April 2024, you must notify HMRC within 92 days of the date of grant. For any options granted on or after 6 April 2024, you’ll need to notify HMRC by 6 July following the end of the tax year in which the grant was made.

For example, if the option was granted on 8 April 2024, you’d have until 6 July 2025 to tell HMRC about the EMI grant. If you fail to meet these deadlines, you and your employees may lose your EMI tax benefits.

Bear in mind that the registration process can be quite lengthy, as you need to complete the option details for each employee. So, be sure to allocate plenty of time for these administrative steps to avoid any delays.

Managing the scheme

Long-term, you’ll also need to manage your Enterprise Management Incentive scheme. For example, when employees exercise their share options, or if you want to add or remove recipients, you will need to update your records. You must keep your records up to date, as you will need to submit an annual ERS return to HMRC every year to inform them of the status of the scheme and the options (even if no changes have been made).

This, along with the set-up process, can be very time-consuming for a busy business owner, particularly as the devil is in the detail. For this reason, we highly recommend assigning these tasks to senior members of your financial or legal teams. If you’re short on resources, it’s worth speaking to a corporate lawyer and tax advisor, who can help you set up compliant Enterprise Management Incentives.

Benefits of Enterprise Management Incentive schemes

So, what exactly are the benefits of setting up an EMI scheme? Whilst we have touched on a few already, below are some of the biggest advantages that EMI schemes provide for small businesses:

  • Tax benefits: As we’ve already covered, employers and employees have significant tax benefits.
  • Attract new talent: Stand out to new recruits by offering employees a share of ownership in the company.
  • Cash-free alternative: The initial cash outlay in setting up a scheme will be much less than having to pay out large salaries and bonuses.
  • Retain staff: EMI schemes are typically used to incentivise employees to stay loyal to the company. With the right EMI scheme, you can retain talented staff to keep driving your business forward, and avoid having to spend time and money on replacing team members.
  • Reward employees: EMI schemes are an excellent way to reward hard workers and share your company’s success with them.
  • Improved productivity: Employees are likely to be more productive when they have a potential portion of company ownership – this helps to align their goals and values with the company’s.
  • Higher engagement: Staff are not only more productive, but also more engaged in the business, when they have a personal interest in it.
  • Flexibility: Design the EMI scheme that’s right for you, your business, and your staff.

Thanks for reading

In conclusion, Enterprise Management Incentive schemes are a tax-efficient way to give your team the option to purchase a share of the company. This can be used to provide compelling incentives for employees and retain top talent. The process can be complex and time-consuming for business owners, so use our guide to learn everything you need to know about taxation, registration with HMRC, and the considerable benefits of granting EMI options to your employees.

Thanks for reading. We hope you found this article useful. If you have any questions or comments on EMI schemes or other share option schemes, please post them below and we’ll be happy to help.

About The Author

Profile picture of Kate Moss-Robins.

Kate is a Senior Content Writer at 1st Formations, responsible for creating articles focused on corporate services and business support. She believes that demystifying complex financial topics helps to promote economic well-being and confidence. Previously, Kate worked in start-ups, gaining insights into the small business world. She is completing a course in Company Secretarial Practice and Share Registration Practice.

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