Companies House: From Passive to Active
Introduced in 2000, Enterprise Management Incentives (EMI) are an increasing popular form of share option available to trading companies with growth potential. In 2019-20, the office for National Statistics reported that 4,330 companies granted EMI options.
The increase in uptake of EMI is primarily due to the favourable tax treatment afforded to both the Company and the employee on the grant of the option.
HMRC established the EMI scheme with three core aims;
– to allow smaller companies to compete more effectively with larger companies for highly skilled employees;
– to help smaller companies retain key members of staff; and
– to help develop and grow smaller businesses.
What is a Qualifying Company?
To grant shares under an EMI arrangement, a company, including one incorporated outside the UK, must:
- be independent of other companies i.e., be the holding company;
- have gross assets of less than £30 million at the time of grant;
- have fewer than 250 employees at the time of grant; or
- be a trading company, or the parent company of a trading group.
It is worth noting that companies that work in ‘excluded activities’ are not allowed to offer EMI options. Excluded activities include banking, farming, property development, provision of legal services and ship building.
What is a Qualifying Option?
EMI options must be granted to employees or company directors over ordinary shares that are fully paid. The shares must not be redeemable but may be subject to restrictions.
At the time of writing, the current individual limit for EMI options is £250,000 worth of shares per individual. A company cannot grant EMI options over more than £3 million worth of shares at any one time. EMI options must be capable of being exercised within 10 years of the date of grant according to the EMI code.
Who is an Eligible Employee?
An employee is eligible for EMI options if they work for the company, or group, for at least 25 hours per week or if less, at least 75% of their working time.
Employees holding more than 30% of the share capital prior to the options being granted are excluded from participation.
Company: Corporation tax deductions may be available to the employee option holder’s employer company – not the company whose shares are acquired, if different. The deduction is equal to the gain the employee makes.
Employee: No income tax is payable on the grant of the option and no income tax is payable on exercise, provided the option was not granted at a discount and is exercised within 10 years of the grant. On disposal of EMI shares, the difference in value from the market value at date of grant to the sale price, will usually be liable to capital gains tax at the 10% rate of tax, qualifying for entrepreneurs’ relief.