Opportunity and a threat
EMI schemes are one of a range of share incentive schemes intended to increase employee productivity and help small, innovative companies attract and retain highly-skilled talented people.
Start-ups are often very reliant on tax reliefs to make risks of innovation and enterprise worthwhile. Qualifying as an EMI company creates an opportunity to offer employees the option to buy company shares for a fixed price in the future. And whilst this may sound good news for a company hoping to retain key talent, the rules are tricky and both the company and the employee must be aware of them or risk breaching one of the conditions by accident and triggering a surprise bill from the taxman.
Key EMI advantages?
- If both a company and employee qualify, provided the option price equals market value (MV) of shares on the date they are granted, then no Income Tax (IT) or Capital Gains Tax (CGT) is payable on the grant, or the exercise of the options which may be much later. This is good news.
- More good news is that Entrepreneur’s Relief is also available to employees on their CGT liability on disposal of shares, provided they remain an employee of the company at disposal and have held the options and/or shares for the required period of time; this reduces the rate of CGT to only 10%.
- And for companies, EMI is also helpful, as Corporation Tax (CT) relief can be claimed on the difference between option price paid by the employee and MV of the shares on the date the option is exercised (if higher). And that CT relief is often regarded as an asset in sale negotiations for the company.
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The disadvantages of EMI
Whilst there is flexibility for companies wanting to enter EMI schemes, there are significant restrictions too, and the legislation is highly complex. For example:
- some trades are excluded from using the EMI Scheme altogether, including banking, farming, property development, legal or accountancy services
- companies are also limited to issuing EMI options over shares with an aggregate MV of £3m or less
- an employee is limited too, to holding unexercised EMI options over shares with an aggregate MV of £250,000 (including unexercised company share option plan options), and receiving EMI options over shares worth a maximum of £250,000 in any three-year period.
If these limits are exceeded, the excess does not attract EMI tax advantages.
Also, a number of events can disqualify unexercised EMI options, including:
- the company ceasing to be independent (e.g. where it becomes a 51% subsidiary of another company)
- the company ceasing, or failing to begin, a qualifying trade
- some variations to terms of the options, or to the share capital of the issuing company
- the employee being granted Company Share Option Plan options in excess of the £250,000 limit.
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If the options are not exercised prior to or within 90 days of the disqualifying event, EMI tax advantages are all lost.
Where a company ceases to be independent, the purchasing company may be able to grant replacement options, preserving the EMI tax advantages. But requirements for this are not easy to understand and it is sensible to take expert advice in many instances.
There are also strict reporting requirements. For example, HMRC must be notified within 92 days of the grant of any new or replacement options, and if this does not happen, the tax advantages will be lost.
In summary, for small, innovative, expansion-focused local companies, EMI can be a great incentive to attract and retain key talent, yet it does make sense to seek expert advice, to minimise the risk of your company and your staff receiving unnecessary, unwanted tax bills.