To successfully set up an EMI share scheme there are strict eligibility criteria to meet, approval required from internal and external parties, as well as deadlines to meet. It can be extremely complicated, and businesses are advised to seek professional support from both solicitors and accountants to ensure the scheme is operating to the company’s expectations and correct purpose.
What is the difference between shares and share option?
To begin creating an EMI scheme, the company will need to decide if it is offering employees shares in the company straight away or a share option. For some companies or in certain situations, an employee may receive shares from the onset of joining the company. For example, if a new managing director has been brought in, it may be decided that, due to the role being so integral to the success of the company, shares will be granted immediately.
On the other hand, a company may see a share option as way to incentivise a new employee to perform well or to stay at the company for a guaranteed period of time. A share option simply means that the employee will be given the right to purchase shares in the company at a later date if they wish. Generally, stipulations will also be set out as part of the share option agreement such as when shares can be purchased, the maximum number of shares and how much the shares will cost.
There are advantages and disadvantages to both shares and share options, so you may want to consult an expert to help you determine the best course of action for your business. One disadvantage to granting shares straight away is if the employee decides to leave sooner than expected. You may therefore need to ensure you have a strong shareholders’ agreement in place. Although a share option is a good way to combat this problem, managing an EMI share scheme requires annual filing and so may be much more work for yourself or higher accountancy fees to complete (however these fees can be deducted from your corporation tax).
Who is eligible for EMI share schemes?
Using an EMI share scheme is only available to some companies. To be eligible a company must meet all of the qualifying conditions:
- The company must have under 250 members of staff
- It must have gross assets of less than £30 million
- The company cannot be controlled by another company (it cannot be a 51% subsidiary of another company)
- The company must carry out a qualifying trade. Excluded activities include banking, farming, property development, provisional of legal services and ship building. A full list of excluded activities can be found here.
- The company cannot offer more than £3 million in share options at any time (with the value of the shares based on market value at grant)
- The company must have a permanent establishment in the UK
For the employee to be eligible to receive tax benefits from the EMI scheme, they personally also need to fulfil qualifying conditions:
- The employee must be employed full-time, working a minimum of 25 hours per week, or dedicating 75% of their working time to the company (whichever is less will qualify).
- They cannot hold more than 30% of the company’s ordinary share capital
- Their EMI option must not at any time exceed £250,000 (at the time the share option is granted, not when the share option has been exercised)
- Should the employee leave the company before exercising their share option, they only have 90 days from the date of exit to do so or they will lose the EMI tax benefits
How to set up an EMI scheme
Once a company has established it is eligible to use EMI share schemes it can begin to create its scheme which means defining certain details. One of the most important factors to decide upon is the ‘vesting period’. This is the amount of time that needs to pass or an event which triggers the option to become available to the employee. A company could decide that an employee needs to have worked for a least 5 years before being able to exercise their share option (the 5 years becomes the vesting period) or it could decide that the option only becomes available upon exit (such as when the company is bought out).
When details have been finalised, the next step is to attain a valuation of the company. This is a crucial part of setting up the EMI scheme as it will determine how much the employee will have to pay for their shares. You can do this yourself, use an independent valuer, or even ask your accountant. The valuation report should be submitted to HMRC, alongside a VAL231 form which tells HMRC that you are applying to set up an EMI scheme. If the valuation report and application have been approved by HMRC you will receive written confirmation sent to you by post. From then, the approval of valuation will be valid for 90 days in which you have to get the scheme set up.
To get your EMI scheme set up, you need to create a share pool and get this authorised by the company’s advisory board, external investors and other existing shareholders (where applicable). The share pool is the number of shares that will be available to offer out to employees as options. For example, you may create a pool of 100 shares where 5 employees will be entitled to 20 shares each once the vested period has passed. Most companies will require formal approval which means getting authorisation recorded and documented in writing such as board minutes.
Next, you can grant the EMI share option (or shares) to the employees. Make sure they are aware of any conditions that need to be met in order for them to remain eligible. Be prepared to answer questions regarding tax implications or how they need to go about exercising their share option once available.
To finalise the EMI scheme, it must be registered with HMRC alongside details of the granted options. This needs to be completed within 92 days of when the option has been granted. To do this, you need to log in to your HMRC business account which also has PAYE set up and navigate to the Employment Related Securities (ERS) section of the HMRC online portal. There you can select to register a new EMI scheme which will ask you to enter details such as the tax year the scheme will be operating and the name of the scheme. Once you have registered it you will receive a response from HMRC and from there the scheme is set up and in operation.
How to manage an EMI scheme
EMI schemes require continual management in the form of filing annual returns. This is due on 6 July each year and you are required to update HMRC on the status of the scheme including any changes that have been made such as cancellation, removing or adding new employees onto the scheme or where share options have been exercised. Even where no changes have been made, a return must be submitted to HMRC confirming that the status of the scheme is the same as before. Your annual return can be filed by accessing your HMRC business account, in the same ERS section as used for registering the scheme. If you miss the filing deadline you may face a penalty.
Selling EMI shares
Employees can dispose of their EMI shares in a number of different ways. One factor that may restrict their choice is how the shares have been issued: either digitally stored online on a platform or traditionally in paper format. Paper format shares can be transferred into digital format on some platforms so this can still be an option for some.
Employees can either sell their shares by managing online themselves, or they can enlist a broker to sell their shares for them. This is considered a more expensive option as brokers will charge a fee, and this often includes a fee for their expert advice as part of the service. A cheaper alternative could be to use a broker service through a bank as many will be able to help you dispose of shares without advice which can cut costs.
Before selling EMI shares, it is highly recommended that you seek advice from an accountant. Not only can they help check all requirements have been met to ensure you receive EMI tax benefits, but they can offer advice on how to make the most of capital gains allowances. For more information on EMI share schemes, please see our service page to discover how we can help or get in touch directly to discuss your requirements.
To begin setting up your own EMI share scheme, please take a look at our service offering.