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 The Enterprise Management Incentive (“EMI”), introduced in the Finance Act 2000, is a highly tax-efficient method for providing targeted incentives to key employees or employee groups. It is structured as an option scheme, whereby the employee is granted the right to purchase company shares in the future at a price set at the date of grant. The employee gains when the value of the shares rises above the purchase (exercise) price. The EMI is designed for use by smaller companies.
Main Conditions to Meet
The company must be independent, with gross assets not exceeding £30 million at the date of grant. Companies engaged in activities such as certain financial or legal services, dealing and property are excluded. Overseas companies can offer EMI options as long as at least one group company is mainly engaged in a qualifying activity in the UK.
Each employee may be offered options over shares worth up to £100,000 at the date of grant (this is an all-time limit, not per grant). The shares used must be non-redeemable but may be of any class, with or without restrictions, and may be non-voting.
Any number of employees may participate subject to an overall limit on the value of the shares of £3 million per company.
Tax Effects
The exercise price can be set at the discretion of the employer. If set at or above fair market value at the date of grant, there will be no tax or national insurance payable on grant, or on exercise of the option. When the shares acquired through exercise of the option are sold, then the individual will be liable for capital gains tax on the profit. However, this will be reduced by business asset taper relief which runs from the date of grant of the option. The result of this is that the effective rate of tax
will fall to just 10 per cent after 2 full years from the date of grant.
If the exercise price is set below fair market value at the date of grant, income tax will be payable at exercise equal to the difference between the exercise price and fair market value. The remainder of the gain will be subject to capital gains tax reduced as appropriate by the business asset taper. In a private company, the fair value of the shares is negotiated with the Inland Revenue (the value being taken before allowance for any restrictions on the shares). The exercise price may, if the employer wishes, be set at zero (subject to certain technical considerations). This has the effect of
removing any downside risk for the employee.
Individual performance conditions can be attached both to the grant and the exercise of each option, and EMI options can therefore be used as powerful short term or medium term incentives, or both. There is no statutory minimum period before options can be exercised, although most employers impose a minimum limit of say two or three years. Normally there will be a maximum exercise period of 10 years, although this can be shorter at the employer’s discretion.
There is no need to obtain prior Revenue approval before establishing a scheme. However companies operating schemes must meet detailed conditions and make annual returns. Schemes will be subject to inspection by the Inland Revenue. Many private companies will wish to ensure that employees can convert their shares into cash without the company having to be sold or floated. This can be done
through the creation of an internal market in the shares, effectively provided by the
employer.
How we can help you
For further advice on setting up an Enterprise Management Incentive Scheme please talk to us.
Got a Question?
If you have any queries on any of the above, please ask a question
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