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Compliance & Tax

EMI Share Options

Our guide to Enterprise Management incentives (EMIs)

What is an EMI share option scheme?

EMI schemes are really tax efficient scheme set up for UK based businesses. They help small businesses reward employees for future growth by providing options for key staff members.

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Why should I set up an EMI scheme?

It’s a great way to reward your key employees without an immediate payment and to incentivise.

Tax Benefits

Employees only pay 10% Capital Gains Tax

There is no PAYE and NIC charge if the market value of the options equals the exercise price

The difference between what the employee pays for the shares and the option value when they are exercised is an allowable deduction for corporation tax

Process

Set up an EMI scheme

Prepare the EMI Option Scheme Agreement

Register EMI scheme with HMRC by the 6th July following the tax year it was established. This can be done online on the HMRC Business portal.

Agree a valuation with HMRC

Submit a proposed valuation with HMRC. HMRC writes back to agree valuation. This typically takes a month.

Granting share options

Authorise the share option pool from your board

Issue share options to employees within 90 days of valuation approval.

Notify HMRC within 92 days of every round of option grant

For each round of options granted a separate notification must be issued

Annual notification

By the 6th July, notify HMRC online of any changes

Notification includes cancelled or lapsed options in the year

Common Mistakes

There are lots of mistakes that can occur with EMI schemes. A significant amount of these overlap with mistakes regarding Equity Management which are discussed in detail

here⁠

. These can be prevented by better processes in place.

Incomplete records: EMI options have been issued to employees but there is no central record of what they are

Missed notifications: Not being aware of requirements to notify HMRC of shares as they are issued and that an annual notification is required

Explaining share options to the wider company

Shares vs options

An option isn't the same as share. Instead, an option gives you the right to own a share. It is normally more tax favourable to grant options than to grant shares directly. A share is as you would know it, a share in the company. A share gives you voting rights etc. An option doesn't.

Definition

Grant - This is when the company gives you the options. Granting doesn't mean you immediately have access to it as it is still subject to the vesting terms.

Exercise - This is when you convert your options into shares. You would pay the exercise price per share that has been agreed to exercise the shares.

Vesting terms

All options will have a vesting schedule. Vesting schedules can vary depending on the contract agreed. The vesting schedule determines when the employee is allowed to exercise their options.

Options will be granted in three month tranches with the first one being granted for the period 1st - 31st of March 2017.

1/3th of the Option Shares shall Vest for each calendar month from the 1st of January 2017 to the 31st of March 2017.

The number of options granted in each period is calculated with the pre-money valuation of £1,450,000. Total issued shares is 6,850.

The formula is for the number of options granted is;

Day Rate x Number of Days Worked x Total issued shares

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Pre money valuation

Dilution

Dilution occurs when we raise external financing. Typically, we have to issue shares for the new investors which would lead to your shares being diluted.

The dilution factor will decrease as we grow as instead of issuing shares, current shareholders can sell their shares to new investors. This allows current investors to cash in.

Dilution isn't something to worry about. Although your share might get smaller, the pie would hopefully get bigger. So, it should be a positive net result.

Tax implication

There is no tax charge on the grant of share options.

On the exercise the option, income tax and National Insurance is charged on the difference of the market value, as agreed with the and the option exercise price. There will also be National Insurance (NI) liability for you and the company.

On the sale of shares there will be a charge to capital gains tax ("CGT") on the difference between the price received for the sale of the shares and the market value on the date of exercise of the option. With EMI options, there is a very generous Entrepreneur’s Relief which means you only pay 10% of CGT on the gains.