Most tech startups will likely qualify. A qualifying company or group must be independent, i. The company or group must carry on a trade and must not, to a substantial extent, carry on excluded activities.
Working with its professional advisers, the company should first establish whether it is EMI qualifying. If it is, it should decide in outline how its EMI scheme plan is to work. Once these issues are decided, formal EMI option agreements should be prepared recording all the relevant terms. Once signed by company and employee, the options are formally granted.
Also, it is normal practice to agree the market value of shares with HMRC in advance of the options being granted, as this will provide certainty as to the tax treatment of option exercise.
EMI Options is proven incentive for employees, and companies that do not offer options may be at a competitive disadvantage in recruitment. If your company has yet to implement an option plan, maybe now is the time to consider it. Sep Getting your head around how they work is another matter though! That's why we've created this guide to EMI schemes, to help you understand if an EMI scheme is right for your business and how they work.
An EMI scheme is a type of tax-advantaged employee share scheme. EMI share incentive schemes allow employers to issue share options the right to acquire shares in a company to key employees, incentivising them to work hard and make the business a success. By including vesting provisions minimum periods of employment and performance criteria targets which need to be met , employers can ensure only committed employees are rewarded for their efforts in growing the business.
The EMI scheme provides employers and employees with attractive tax breaks, making it the most common form of share incentive plan for startups and SMEs looking to recruit and retain talented employees. The main attraction of an EMI scheme is the tax advantage it offers employees.
As an HMRC approved scheme, employees benefit from paying no income tax and national insurance when the grant is issued and exercised. Employers are able to deduct the cost of setting up and running an EMI scheme from their taxable income for corporation tax purposes. Employers are also able to deduct the gain on the shares between the grant and the date of exercise from their taxable income for corporation tax purposes.
Share incentive plans, such as EMI schemes, are complicated and generally too difficult to set up without professional help. The main reason for setting up an EMI scheme is to incentivise talented employees to join the business and help make it a success.
This could even end up leading to the opposite effect implementing an EMI scheme was intended to achieve in the first place. More complex schemes for larger employers are likely to cost significantly more.
The options may also lapse and be forfeited if the employee tries to assign them or grant security over the options. As the employer has responsibility for making income tax and national insurance payments through PAYE to HMRC the option scheme agreement should contain appropriate indemnities for tax and national insurance contributions and provisions for recovery of such payments from employees. The shares under option must be part of the ordinary share capital of the qualifying company, fully paid up and not redeemable as stated at paragraph 35 Schedule 5 ITEPA , while the options must be capable of being exercised within 10 years.
We recently advised on an EMI share option scheme where HMRC agreed a valuation relating to options granted in respect of B shares to be issued once the option is exercised.
For example, an option granted may vest over a four year period, following which it may be exercised in whole upon the exercise conditions being met for example, in an exit only scheme, the company being sold. The vesting period can be up to 10 years exercise has to happen within 10 years from grant and the vesting frequency is usually either monthly, quarterly, or more often annually.
Its not necessary, but as good practice some advisers we know as a matter of course seek advance assurance from HMRC that the EMI option scheme qualifying criteria are met.
An advance assurance application is made by preparing and sending a letter to HMRC together with supporting documentation. Although the procedure is not statutory, HMRC is normally bound by any assurance given, provided the information supplied was correct and complete at the time it was given and has not been superseded by subsequent events. It is therefore important that all relevant information is supplied in writing. The EMI contractual documentation used must contain details of any restrictions e.
The company granting the options also needs to ensure that the employee is provided with a fully executed copy of this declaration within seven days of it being signed. From a tax perspective, the scheme must be registered with HMRC and HMRC notified of options granted within 92 days of establishment being the date of grant.
There is an annual return known as an EMI40 that must be filed by 6 th July following the end of the tax year. Its important to note that the registration period is strictly enforced by HMRC with only very limited reasonable excuses permitted. There are a number of steps to the online registration process and companies are advised to start the process as soon as possible in order to ensure that they can comply in time.
Alternative schemes other than EMI are discussed here. The option shares can be a different class of ordinary share that could for example be non-voting and subject to buyback if the employee leaves. The option will be formalised in a legal contract, which will include all the necessary rules and conditions. Some of the matters to consider when designing an EMI scheme will include the following, all of which we will help you with:.
We are a small company employing fewer than 20 people so the process of setting up a company share scheme was pretty daunting. The Mill Consultancy worked with us at every stage to make sure we understood the process and got the paperwork right.
We have set up well over EMI schemes, and for all types of industry sector. It's one of our core activities and our approach is personable but highly efficient.
If the scheme is for a larger number of employees, please let us know, as there are other forms of scheme,. We have worked with a number of accounting firms to set up EMI and other schemes for their clients. Please contact Jerry Davison to discuss how we can work together. We chose the Mill Consultancy to create our share scheme based on the all inclusive package i. We were very happy with our decision.
Jerry at Mill Consultancy was fast and effective whilst always maintaining great communication and being happy to help with any questions we had.
What to a small company had seemed a daunting task turned out to be a very smooth procedure indeed and all thanks to Jerry for that. I talk about key areas such as the design of your option scheme, which staff should get share options, how many each, and when they can actually buy the shares. When you set up your EMI option scheme you need to consider when the employees can actually buy their shares.
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