In an effort to create a more streamlined and efficient system, the UK government has made some amendments to the Enterprise Management Incentive (EMI) Code.
These changes are designed to ease administration and simplify the qualifying criteria for EMI share schemes.
A Brief Overview of EMI Share Schemes
First, let's quickly revisit the basics. EMI share schemes offer a tax-efficient way for companies to grant employees the right to acquire shares in their employing company.
The EMI scheme provides a host of benefits including:
- attracting and retaining top talent
- promoting long-term employee retention and
- linking rewards to performance conditions (if applic).
In summary, they are a useful tool for businesses, particularly ambitious growing companies, to motivate their employees by offering a (future) stake in the business.
Key Changes to the EMI Code
Changes implemented from 6 April 2023
The first wave of changes sought to eliminate some administrative burdens and clarify the process:
- Removal of Detailed Restrictions: Businesses no longer need to detail restrictions on the shares acquired in a share option agreement on the exercise of an EMI option. This reduces the complexity of the documentation involved.
- Removal of Working Time Declaration Requirement: Companies are no longer required to declare that an employee has signed a working time declaration when issued with an EMI option.
It is important to note that while the requirement to make a working time declaration has been removed, the working time requirement still exists.
This requirement is:
Employees are only eligible for EMI options if they spend 75% of their time or at least 25 hours per week working for the company.
Changes to be implemented from 6 April 2024
Another significant change is due to take effect in 2024:
- Extended Deadline for Notifying an EMI Option: The deadline for notifying an EMI option will be extended beyond the current 92 days following the date of the option grant. HMRC will need to be notified by 6 July following the end of each tax year, aligning with the deadline for filing online share scheme returns.
All these changes are welcomed to reduce the admin burden on businesses.
Tax Advantages of the EMI Tax Incentive
EMI schemes are among the most tax-efficient types of share option schemes available to UK-based businesses. Income tax and National Insurance Contributions (NICs) are not normally payable when EMI options are exercised (if the option exercise price is the same as the market value at the date of grant).
Plus the growth in value of the option is typically taxed under Capital Gains Tax (CGT). When EMI shares are sold, Business Asset Disposal Relief (BADR) can apply if the options are exercised more than two years following the date of grant, potentially resulting in a CGT charge at the lowest rate of 10% (on the first £1m).
Eligibility for EMI Schemes
To be eligible for an EMI scheme, an employee must meet the following criteria:
- Be an employee of the company or a subsidiary of the company.
- Work for the company for at least 25 hours per week or 75% of their working time AND
- Not hold more than 30% of the company.
Note that certain companies involved in 'excluded activities' to a substantial extent (including banking, farming, property development, provision of legal services, and shipbuilding) are not permitted to offer EMI options.
In conclusion, the recent changes to the EMI Code aim to make the implementation and administration of EMI share schemes easier for businesses. However, the process of setting up an EMI scheme can still be complicated, and failure to comply with the legal requirements can result in increased costs and potential tax liabilities. Therefore, it's crucial to seek professional advice.
Last updated: 20 June 2023