The EMI Share Scheme: Driving Growth with Enterprise Management Incentives

So, how do you create a real connection between your employees' hard work and your business's long-term success? For thousands of fast-growing UK companies, the answer often lies with the Enterprise Management Incentive (EMI) scheme.

As one of HMRC’s four tax-advantaged employee share schemes, the EMI is set up for small to medium-sized enterprises and unlisted companies. Essentially, it allows you to grant share options to your staff, creating a compelling financial incentive that connects employee rewards with company performance.

Why do nearly nine out of ten growing organisations opt for EMI over other options like growth shares? It comes down to the distinctive and substantial tax benefits it offers to both the business and the employees. If your organisation is aiming to align your team's drive with your commercial goals, while also managing the economic and financial pressures of running a business, the EMI scheme is certainly worth a closer look.

What is an EMI Scheme?

The Enterprise Management Incentive scheme is a UK government-approved share option that gives employees the option to buy shares in the company they work for at a fixed price. When the company performs well, employees benefit directly from the increase in share value.

How does an EMI Scheme work?

An EMI scheme provides a cost-efficient method for growing companies to reward top talent, without requiring significant upfront investment in salaries or bonuses. It promotes an ownership mentality, directly linking employee motivation to company success.

Overview of the EMI Scheme process:

1. Grant: The company gives the employee the option (the right, but not the obligation) to purchase a specific number of shares at a fixed price. This price is usually set based on the current, often lower, market value of the shares on the day the option is granted.
2. Vesting: The options typically can't be used straight away. They need to 'vest' first, which means becoming officially available. This usually happens over time, for example, by requiring the employee to remain with the company for a set number of years (a service condition) or by meeting specific targets.
3. Exercise: Once the options have vested, the employee can choose to 'exercise' them. This is the date that the employee actually buys the shares and they pay the fixed price set at the time of the grant.
4. Sale: The employee makes a profit when they sell these acquired shares. The financial gain is the difference between the price they sell the shares for and the lower fixed price they originally paid to exercise the options.

EMI Scheme Tax Benefits

The Enterprise Management Incentive scheme stands out as the most tax-advantageous way for eligible companies to grant share options to their employees. By choosing EMI, both the company and its staff can benefit from tax savings, a key reason why so many businesses are drawn to the scheme.

*If the option was granted at a discount (below market value), Income Tax and NICs are payable on the amount of that discount (or the gain on exercise, if lower).

**The standard CGT rates will apply if the shares are sold within 24 months of the date of grant, or if the BADR lifetime limit has been used up.

Which companies are eligible to set up an EMI scheme?

To qualify for an EMI scheme, a company must meet specific criteria set by HMRC, including:

• Gross Assets: Total gross assets must not exceed £30 million.
• Employees: Must have fewer than 250 full-time equivalent employees.
• Independence: The company must be an independent trading company and not a 51% subsidiary of another company.
• Qualifying Trade: The company must carry out a 'qualifying trade'. Some activities are not eligible, including banking, property development, farming, legal services, and ship building.
• UK Establishment: Must have a permanent establishment in the UK.

Who can qualify to receive EMI options?

To be eligible to participate in an EMI scheme, employees must meet specific requirements, including:

• Working Time: Must be working for the company for at least 25 hours per week or 75% of their total working time.
• Shareholding Limit: Must not have a 'material interest' (i.e., already own more than 30% of the company's share capital).
• Individual Cap: A single employee can only hold unexercised EMI options over shares with an initial market value of up to £250,000 at any one time.

How to Set Up an EMI Scheme

To successfully launch an Enterprise Management Incentive scheme, companies should follow a sequence of six steps. These ensure compliance with HMRC regulations and maximise the scheme's tax benefits.

Establish Eligibility & Strategy

First, confirm that your company, your employees, and the share options themselves all meet the specific rules for the EMI scheme. If you don't qualify, you can't proceed.

Secure an Official Share Valuation

You need to officially establish the value of your company's shares with HMRC. This valuation is vital because it sets the price your employees will pay for their options and determines the tax benefits they receive.

Authorise the Option Pool

The company must officially approve the creation of a pool of shares to be used for the employee scheme. This step requires formal approval from your board and shareholders.

Draft and Adopt the Scheme Rules

Work with your advisers to design the scheme so that it fully complies with EMI rules when you file it with HMRC. You will need two main legal documents:

• Scheme Rules: This document outlines the overall policies and structure for how the EMI scheme operates.
• Option Agreements: This is the individual contract for each employee, detailing the number of options they receive, the price, and the conditions they must meet before they can buy the shares (exercise them).

Grant the Options

Once the paperwork is ready, you can officially grant the share options to your employees.

Register and File with HMRC

This final stage is a two-part process that includes both an immediate, time-sensitive registration and ongoing management responsibilities:

• Initial Registration: You must register your new EMI scheme, including details of the options granted and the employees who received them, with HMRC within 92 days of the grant date. Missing this deadline will mean the options lose all their valuable EMI tax benefits.
• Annual Filing: To keep the scheme registered and ensure employees keep their tax advantages, you must file an annual Employment-Related Securities (ERS) return with HMRC every year, even if there were no changes to the scheme.

Taking Control: Securing Your EMI Success

The success of your Enterprise Management Incentive scheme relies on carefully following HMRC’s rules. Even small errors can threaten your tax relief. Because the administration is detailed and ongoing, professional advice is essential to safeguard your investment and ensure everything is set up correctly from the start.