The EMI scheme enables small trading companies (those with under 250 employees and under £30m assets) to award employees tax-favoured share options. This can help the company to:
- attract and retain the best people;
- share with its employees the fruits of growth and success;
- encourage a sense of ownership and long-term commitment.
EMI share options give employees the right to acquire shares in the company for a predetermined price (the "exercise price") in specified circumstances, and, potentially, subject to the employee meeting certain conditions (e.g. as to length of service).
There is no income tax or NIC charge when qualifying share options are granted to employees. If the exercise price is not set at a discount to the market value of the shares when the option is granted, there is no income tax or NIC charge when the share options are subsequently exercised, either.
If the exercise price is set at a discount to the market value of the shares at the time the option is granted, then an income tax charge arises when the share options are exercised, based on the difference between the exercise price and the market value of the shares at the time the options were granted. An NIC charge would only arise in these circumstances if the shares amounted to "readily convertible assets".
When an employee subsequently sells the shares, any gain will be subject to Capital Gains Tax (CGT) but may qualify for Entrepreneur's Relief, in which case the CGT will be charged at only 10%.
From the company's perspective, for corporation tax purposes relief is available when the share options are exercised, based on the difference between the exercise price and the market value of the shares acquired. The costs of setting up and administering an EMI scheme are also deductible for corporation tax purposes.
Various qualifying conditions apply. The company must be a small company (as defined earlier), not majority owned or controlled by another company, and not falling within a list of "excluded industries" which includes things like property development, farming, and leasing. The employee must be employed at least 25 hours per week (or, if less, at least 75% of their total working time), and may not hold more than 30% of the company's shares nor options worth more than £250,000 (at the time of the grant).
EMI schemes are relatively simple to administer. Once a scheme has been set up it is normal practice to agree a valuation of the shares with HMRC, which provides some certainty for the company and its employees from a tax planning perspective. HMRC must be notified of the grant of an EMI share option within 92 days of the date of the grant.