Employee Management Incentive (EMI)

An Enterprise Management Incentive, or EMI, is a government-backed, tax-advantageous share options scheme. It

is mainly used by small to mid-sized UK businesses looking to share their successes with their team as their
company grows. An EMI allows the company not only to reward its employees with options having massive tax
advantages, but also offset both the cost of the scheme and the tax benefits achieved by the employees against
company’s tax liability.

A company can select employees and give them the option of acquiring shares over a prescribed period, subject to
qualifying conditions being met.

The impact on the employee receiving an EMI option is:

 There is no tax charge on the exercise of an EMI option providing it was granted at market value.

 If the company’s share price has increased in value between the time of grant and exercise, the uplift is
not charged to Income Tax.

 There will be a Capital Gains Tax (CGT) charge when the employee disposes of his shares and proceeds
exceed the market value at the date of the grant of the option.

 Valuations can be agreed with HMRC.

Tax-advantaged status can be lost if the company:

 Does not set up its EMI within the terms of the legislation.

 Fails to notify HM Revenue & Customs (HMRC) of the grant of an EMI option within 92 days, or

 If a disqualifying event occurs and option holders fail to exercise their options within 90 days.

The directors need to be aware of the type of events that may disqualify a scheme as they will be able to avoid
them if they know what to watch out for.

EMI conditions: 
Qualifying companies
 The company must be independent – not under the control of another company or quoted. Note that an
arrangement to sell the company (i.e. when heads of terms are signed to sell the shares) would be
regarded as breaching this rule, without the actual sale taking place.

 Gross assets must be less than £30m.

 Qualifying trades – same excluded activities as EIS (i.e. no financial activities, nursing homes, etc).

 The company (or a company within the group) needs a UK permanent establishment. This differs from EIS
– there the group holding company needs to have a UK PE.

 There must be fewer than 250 employees – note this means full-time equivalent when the options are
granted. Seasonal business can grant options off season when the number of employees is lower.

 The EMI options can total a maximum of £3m – based on the market value at the date of grant.
Employees and qualifying shares
 Employees who satisfy the qualifying conditions are given options to acquire qualifying shares

 Options must be granted for commercial reasons in order to recruit or retain an employee and not as part
of a tax avoidance arrangement.

 The total market value of shares subject to an unexercised EMI option at any time cannot exceed
£250,000. Once the limit is reached, options may not be granted to the individual within 3 years of the
grant of the last option.

 Any number of employees may hold EMI options but the total market value of all shares subject to
unexercised EMI options granted by the company or group, measured on grant, cannot exceed £3 million
at any time.

When someone sells the shares that they’ve acquired via EMI options, they qualify for Entrepreneurs’
Relief, so long as at least 24 months have passed from the date of grant to the disposal of the shares.
And unlike normal Entrepreneurs’ Relief rules, there’s no need for the option holder to own 5% of the
share capital or meet any of the further tests introduced in the recent Budget.

Corporation Taxation of EMI Options

The employing company gets a corporation tax (CT) deduction if qualifying shares are acquired by employees upon
the exercise of an EMI option. The CT deduction matches the difference between the market value when the
shares are acquired and the amount that the employee pays for them. Where the option is to acquire shares at
their market value at the time of the grant of the option, the CT deduction is equal to the amount that would have
been chargeable to tax but for the EMI relief. Where EMI options were granted at a discount, CT relief is given for
both the amount of the discount and the amount that would have been charged to tax but for the EMI relief.

This tax asset belongs to the company and arises before the company is sold. And that means it’s an asset of the
selling shareholders. Also, it’s possible to agree the market value of the company – where for example there’s
deferred consideration – with HMRC for corporation tax purposes after the sale has completed. This is
recommended to maximise the benefits.

This could be a significant sum. Negotiate this into the heads of terms at the outset, otherwise it may be
lost in negotiation.

Key Documents
 Signed EMI Option Deed
 Scheme amendments thereafter, if any
 Online registration of the EMI options with HMRC – It has to be registered with 92 days
 Copies of acknowledgement notifications received from HMRC in relation to the grant of the EMI options.
 Copies of correspondence from HMRC confirming the accepted market value of the Company’s shares for
the purposes of the grant of the EMI options.