Enterprise Management Incentives (EMI) are designed for key employees whom the employer wishes to recruit or retain. They give selected employees Options to acquire a specified number of your company's shares at a pre-determined price (or even free of charge) according to the terms and conditions of the EMI Agreement. This will stipulate how and when the Options are a) granted and b) exercised.
Typically there will be a required period of service (say 3-5 years) and/or performance conditions relating to the company or the employee before the Options are granted. The Agreement must dictate which future events will allow the employee to exercise the Options, such as the acceptance of an offer to buy the company or a flotation on a recognised stock market, although the Options must in any case be capable of being exercised within 10 years.
The scheme works by valuing the shares of the company when the Options are granted and only taxing the employee when he or she exercises those Options and pays less than their value at the date of grant. Therefore, if the Options can be exercised free of charge, the employee would only pay tax on the value of the shares as at the date the option was granted. As this would probably be a few years down the line, it is likely that a growing company will be worth a lot more by then and the employee would only be taxed on a fraction of their value.
There are various conditions relating to the company, the employee and the scheme itself which must be met if the Options are to qualify for tax incentives. For example, the company must have gross assets not exceeding £30 million and fewer than 250 employees. It must also exist for the purpose of carrying on a qualifying trade and be independent (eg it must not be a 51% subsidiary or controlled by another company).
The employee must work at least 25 hours per week or spend at least 75% of their working time carrying out their duties as an employee of the company whose shares are the subject of the Options. Also, they must not have a material interest in the company already (eg controlling more than 30% of its shares) which would rule out most directors and shareholders.
The EMI scheme itself must not allow any employee to acquire shares worth more than £250,000 as at the date they were granted, or more than £3,000,000 for all participating employees. It must be notified to the Revenue within 92 days and be in the form of a written agreement that sets out some particular terms and conditions.
There are also certain future disqualifying events you need to be aware of such as loss of eligibility and changes to share capital.
Come and speak to us if you want help designing an EMI scheme and drafting the Agreement. We can also help with the valuation of the shares and negotiate a figure with the Revenue that will minimise future tax liabilities.