Enterprise Management Incentives
EMI share options & incentive plans
Enterprise Management Incentives are a type of share scheme which is intended for use in smaller companies which are “higher risk”.
Under an EMI the Company may grant employees the option to purchase shares up to the value of £120,000 at market value. If the employee exercises this option, he is not charged income tax on any salary which is paid towards the purchase of these shares; instead, if he sells the shares at a profit he must pay capital gains tax on this profit.
However there are a number of detailed rules on which companies may offer this scheme, what share options may be included, and to which employees the options may be offered:
A company must be a “qualifying company” at the time the option is granted. The company’s shares may be unquoted or they may be quoted on a stock exchange and there is no requirement that the company should be based in the UK. However, the company must satisfy the following requirements:
Independence – the company must not be a “51% subsidiary” of another company. This means that no other company or persons connected with it should control more than 51% of the shares.
Qualifying Subsidiaries – the company must not have a “property managing subsidiary” unless the company has at least 90% control and ownership of the subsidiary. A property managing subsidiary is a separate company which is formed to hold the companies land, leases and buildings.
Gross Assets – the total assets of the company (not making any deductions for its liabilities) must not exceed £30 million. If the company is the parent company of a group, the the definition of gross assets includes the assets of the entire group.
Number of Employees – the company must not have more than the equivalent of 250 full time employees. The hours worked by part-time employees are aggregated together and these are included in the calculation. So, for example, if a company has 500 employees who all work half time, it has the equivalent of 250 full time staff.
Trading activities – the activities of the company must be carried out wholly or mainly in the UK, on a commercial basis and with a view to profit, and must not consist or substantially consist of activities which are excluded. There is a long list of excluded services which include, amongst others, financial services, legal services, money-lending, property, coal or steel production and hotel management.
The options must be granted as a result of the employees connection with the company or with one of the company’s subsidiaries. Options granted to the employee must not exceed £120,000 and once this limit is reached any further options which are granted to the employee will not be qualifying options until 3 years have passed from the date at which the last qualifying option was grated.
In addition, in order to count as a qualifying option, an option must be notified to HMRC and must be set out in a written agreement between the employer and the employee which contains certain required information about the option.
In order for the grant of an EMI share option to attract tax advantages, it must be made to a qualifying employee. In order to qualify, an employee must meet three requirements
- Employment – the employee must be employed by the company or by one of its subsidiaries
- Working Time – the employee must spend at least 25 hours out of each working week on the business of the company. If the employees working week is shorter than 25 hours, he must spend at least 75% of his time on the business of the company.
- Material Interest – the employee must not have a material interest in the company or of any of its subsidiaries and this is defined as owning or controlling more than 30% of the share capital of the company or one of its subsidiaries
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