Enterprise Management Incentives

The Enterprise Management Incentive (EMI) is a form of share option scheme, which can be used to provide tax-efficient targeted incentives to key employees or employee groups. Under the scheme the employee is granted the right to purchase shares in the employing company in the future (an option) at a price set at the date of grant (the exercise price). The employee gains when the value of the shares rises above the exercise price. The EMI is designed for use by smaller companies.

Tax Effects.

The exercise price can be set at the discretion of the employer. If set at or above fair market value at the date of grant, there will be no income tax or national insurance payable on grant, or on exercise of the option. When the shares acquired through exercise of the option are sold, then the individual will be liable for capital gains tax on the profit.

If the exercise price is set below fair market value at the date of grant, income tax will be payable at exercise equal to the difference between the exercise price and fair market value. The remainder of the gain will be subject to capital gains tax, which may be reduced by entrepreneurs’ relief where the relevant qualifying conditions are met. In a private company, the fair value of the shares is negotiated with HM Revenue & Customs (the value being taken before allowance for any restrictions on the shares). The exercise price may, if the employer wishes, be set at zero (subject to certain technical considerations). This has the effect of removing any downside risk for the employee.

Individual performance conditions can be attached both to the grant and the exercise of each option, and EMI options can therefore be used as powerful short term or medium term incentives, or both. There is no statutory minimum period before options can be exercised, although most employers impose a minimum limit of say two or three years. Normally there will be a maximum exercise period of 10 years, although this can be shorter at the employer’s discretion.

There is no need to obtain prior HM Revenue & Customs approval before establishing a scheme. However companies operating an EMI scheme must meet detailed conditions and make annual returns. Schemes will be subject to inspection by HM Revenue & Customs. Many private companies will wish to ensure that employees can convert their shares into cash without the company having to be sold or floated. This can be done through the creation of an internal market in the shares, effectively provided by the employer.

Main Conditions to Meet.

The company must be independent, with a permanent establishment in the UK and gross assets not exceeding £30 million at the date EMI options are granted. It must also carry on, or be preparing to carry on a qualifying trade. This is a trade which is:

  • On a commercial basis with a view to a profit;
  • Does not consist of excluded activities such as dealing in land, financial activities, property-backed businesses such as hotels and nursing homes, farming, accounting services and others.

Each employee may be offered options over shares worth up to £250,000 at the date of grant (this is a limit that applies to all option granted within three years). The shares used must be non-redeemable but may be of any class, with or without restrictions, and may be non-voting.

EMI is limited to qualifying companies with fewer than 250 employees. There is an overall limit on the value of the shares under option of £3 million per company.

How We Can Help You.

For further advice on setting up an Enterprise Management Incentive Scheme please talk to us.