What is an EMI scheme?
An EMI (Enterprise Management Incentive) scheme is a tax-advantaged share option scheme specifically designed for small to medium-sized enterprises (SMEs). The purpose is to help companies attract and retain key employees by rewarding them with equity in the business.
How does an EMI scheme work?
Under an EMI scheme, an employer grants share options to selected employees. These options give the employee (the option holder) the right to acquire shares in the company at a pre-determined price at a future date. The opportunity to exercise the share options is usually based on an event in the future such as a sale or performance criteria.
What is meant by ‘exercising the share options’?
An employee can only acquire shares in your company through an EMI scheme once the exercise event has occurred. An exercise event is stated in the EMI scheme agreement and this could be the sale of the company, achieving certain performance criteria (E.g. EBITDA of £1m) or a length of service. Once the event occurs then the employee can exercise their share options, meaning they acquire shares in your company.
What are the benefits of an EMI scheme for recruitment businesses?
An EMI scheme can be used to incentivise and retain talented employees. Research shows that employees are more likely to feel aligned with the interests of shareholders and the board if they have a tangible interest in the company’s ownership. It can also help recruitment businesses to compete with larger firms when it comes to attracting and retaining top talent.
Can any business set up an EMI scheme?
EMI schemes are only available to SMEs that meet certain criteria, including having gross assets of no more than £30 million, fewer than 250 employees and be an independent trading company (i.e. not controlled by another entity).
Are there any tax implications of setting up an EMI scheme?
There are tax advantages for both the employer and employee under an EMI scheme. For the employer, there are corporation tax deductions available on the exercise of the options, while for employees, there are no income tax or National Insurance contributions payable on the grant or exercise of the options. In addition, the set up costs of the scheme can be offset against corporation tax.
Is there a certain time frame that the options have to be exercised within?
Yes. The options will lapse on the tenth anniversary of the grant date if the exercise event has not occurred.
How many share options can an employee receive under an EMI scheme?
An employee can be granted up to £250,000 worth of share options under an EMI scheme. EMI options can’t be given to anyone who owns more than 30% of the shares.
Can share options be granted to non-employees under an EMI scheme?
No, only employees of the company can be granted share options under an EMI scheme. The employee is required to work a minimum of 24 hours a week or 75% of their working time for the company.
What happens to share options if an employee leaves the company?
If an employee leaves the company, their share options will usually lapse unless there are specific provisions in the scheme rules that allow for them to be exercised.
Can an EMI scheme be offered to overseas employees?
Yes, an EMI scheme can be offered to employees who work overseas, subject to certain restrictions.
Can you add more employees to the EMI scheme further down the line?
Yes, it is possible to grant more options to additional employees at a later date. You may incur additional professional fees to issue these share options.
What is the process for setting up an EMI scheme?
The process for setting up an EMI scheme typically involves the following steps:
- Determine eligibility: The first step is to determine whether your company and your employees are eligible for an EMI scheme.
- Design the scheme:
a. Decide on who the scheme is for. We recommend selecting future leaders within your firm who you would like to incentivise and retain.
b. Consider the objective of the scheme. Is it for retention? Are you working towards an exit?
c. Decide on the exercise event. Is this a sale? A certain milestone? Or perhaps certain performance criteria?
- Determine option allocation: The next step is to determine the number of options to be allocated to each employee, the exercise price of the options, and the vesting period.
- Obtain valuation: The company must obtain a valuation of its shares from an independent valuer to determine the market value of the options.
- Obtain approval: It is advisable to obtain HMRC approval of the valuation. This provides a degree of certainty over the tax position on an eventual exercise of the share options. Once approval has been obtained the company has 90 days to implement the EMI scheme.
- Create the scheme: The company must create the EMI scheme documentation, including the option agreements and the EMI scheme rules.
- Notify relevant employees: Now the EMI scheme has been created, you can communicate with the relevant employees who are eligible to participate in the scheme and provide them with the necessary documentation.
- Exercise of options: When an employee exercises their options, the company will issue new shares to the employee or transfer existing shares to them.
- Reporting and compliance: The company must comply with reporting requirements and keep accurate records of the EMI scheme. The company is required to complete an annual return every tax year by 6 July covering any lapsed and exercised options as well as possible disqualifying events (e.g. the company is no longer independent).
How long does it take to set up an EMI scheme?
The timeline for setting up an EMI scheme can vary depending on various factors, such as the complexity of the scheme and the company’s readiness to implement it. However, on average, it can take between 4 to 8 weeks to set up an EMI scheme, depending on HMRC’s response rate.
Ensure you seek professional advice from an experienced adviser so that the scheme is set up correctly and is compliant with all the relevant regulations.
How much does it cost?
The cost of setting up an EMI scheme can vary depending on the complexity of the scheme but generally you should anticipate professional fees between £5,000 and £9,000. It’s important to factor in ongoing costs such as annual compliance returns and issuing future grants of options.
For more information on EMI schemes, please download our Guide to Long Term Incentive Plans here.
If you would like to discuss EMI schemes further or have any queries please do get in touch.