What is an EMI scheme and why are they used?

In its simplest form, an EMI scheme (Enterprise Management Incentive scheme) is a great additional way to reward key employees in an attempt to attract or retain the most valuable team members in your company. Let’s explore this in a little more detail below.

An EMI works by providing selected key employees with an option (i.e., the right, but not the obligation) to buy an agreed number of shares in the company in which they are employed, at a predetermined price. There can be targets set which have to be achieved first, such as performance, service period, even the sale or floatation of the company. There can also be restrictions placed on the share options, such as voting rights, dividends, and good leaver/bad leaver clauses.

So why would an EMI scheme be of interest to an employee? The idea is that when the company is successful, grows and therefore the share value increases, staff included in the scheme could sell their shares at a profit in a very tax-advantaged way and therefore share in the success of the business. However, because these schemes are highly beneficial and very flexible, they are subject to stringent conditions which have not been covered in this article.

So having established what an EMI scheme is, and why they are used, what is required to set a scheme up; below are the suggested steps required to establish an EMI scheme:

• Establish eligibility.
• Design and draft the scheme.
• Request approval from HMRC for the valuation.
• Authorise the shares required and approve internally.
• Grant EMI options to employees.
• Register the scheme with HMRC.

Establish eligibility – the first step is to ensure eligibility, as there are restrictions both on the company and the employees who can take advantage of the tax benefits offered. A full list of the requirements can be found on HMRC’s website.

Design the EMI option scheme – this is often done with the assistance of a firm of solicitors to draft the option scheme rules and the necessary paperwork to progress the scheme. Questions such as when the options will become exercisable and restrictions placed on the share options need to be decided and agreed.

Request valuation approval with HMRC – although not obligatory, gaining approval from HMRC in advance of the scheme being approved and signed off, provides everyone involved in the process with certainty over the share prices and therefore the tax implications. HMRC suggest they will respond in a 2 – 4 week period and the valuation is approved for a period of 90 days.

Authorise your share pool – where necessary, you can now create the share pool from where you will issue the EMI options. Usually, any external investors and any shareholders will require approval in order to execute the scheme. Again it is advantageous to have the share valuation formerly approved by HMRC, as this will assist in demonstrating the effect on existing shareholders of the dilution of their shareholding following the exercise of the options.

Grant EMI options – following the eligibility checks above, and the approval of the valuation, it is easier to have a detailed conversation with the selected members of staff to explain the option scheme and what it means to them. They may have questions regarding the tax implications or how they exercise the options in the future.

Register your EMI share scheme with HMRC – Once the options have been granted, you must register the scheme with HMRC within 92 days via the ERS online filing system. There is also a requirement to provide annual reporting which must be made by the 6 July.

The above may sound complicated, but it really isn’t that difficult, and it does provide selected staff with a share in the company’s success they are working hard in. This has the additional benefit of aligning the goals of senior managers (participating in the scheme) with existing shareholders.

If this is something that may interest you, and you wish to find out more, please contact Farnell Clarke and we would be happy to discuss and answer any questions you may have.