Enterprise Management Incentive (EMI) options offer tax-advantaged and flexible incentives for companies that meet the qualifying criteria.
EMI options are intended to help smaller companies with growth potential to recruit and retain the best employees. They offer generous tax advantages to employees of those companies that qualify.
For companies and employees who meet the qualifying conditions, EMIs are a flexible and tax-favoured share incentive arrangement.
There are a number of legal requirements which companies must satisfy in order for their share options to qualify as EMIs, including:
The shares used for EMI options can be subject to restrictions, but they must be ordinary shares which are "fully paid up" (for company law purposes) and not redeemable or convertible.
Broadly speaking, a "qualifying trade" is one that is carried out with the intention of making a profit. Unless the company's business consists, wholly or to a substantial extent, of one of HMRC's listed "non-qualifying" activities, it will most likely be eligible. These non-qualifying activities include:
Receiving royalties or licence fees is usually classed as a non-qualifying activity, unless the income is substantially generated from intellectual property belonging to the company or group of companies.
Companies can apply in advance to HMRC for an opinion as to whether a company or group of companies meets the EMI requirements. Companies with overseas activities may qualify to use EMI to recruit and retain UK staff, provided they have a "permanent establishment" in the UK.
The company or group of companies must have fewer than 250 full-time equivalent employees. A full-time employee is one who works 35 hours a week or more, and the company must include fractions representing part-time employees. Non-executive directors and overseas employees and employees of "qualifying subsidiaries" must also be counted.
In order to qualify, participating employees, including executive directors, must spend at least 25 hours per week or, if less, 75% of their working time, on the business of the company or group of companies. Employees must give written declarations confirming that they meet this working time requirement, and the company must retain those declarations.
For companies and employees who meet the qualifying conditions, EMIs are a flexible and tax-favoured share incentive arrangement.
Individuals with a "material interest" (broadly a 30% interest or more) in the company or any of its subsidiaries, either on their own or together with one or more associates, are also unable to participate.
There is a company limit of £3m on the total value of shares (as at the grant date) which may be available under EMI options at any given time. There is also an individual limit on the value of shares (as at the grant date) which any one employee may hold under the EMI option. This limit is currently £250,000. Options under any Company Share Option Plan (CSOP) operated by the company also count towards this limit.
EMIs offer generous tax advantages to both qualifying companies and participants, as follows:
Disqualifying events include:
In addition to these substantial tax advantages, the employer company may also be able to claim corporation tax relief on the option gain.
Employees must be able to exercise EMI share options within 10 years from the date of grant. The EMI option terms must be set out in a written agreement which must detail any restrictions on the shares.
Each EMI option must be notified, electronically, to HMRC within 92 days after its grant in order to secure the tax reliefs. For EMI options granted on or after 6 April 2024, the time limit for notifying the grant will be extended from 92 days after the date of grant to 6 July following the end of the tax year in which the option was granted.
The company must deliver, electronically, an annual return to HMRC in respect of its EMI options.
It is recommended that unlisted companies establish the market value of the shares before EMI options are granted. The value can be formally agreed with HMRC, or the company can use its own valuation although it would then be open to HMRC to query this. HMRC valuation agreements in advance of a taxable event are now only available in a few circumstances, including for a proposed EMI option grant.
HMRC must be notified electronically of any grants of EMI options within the time periods set out above.
HMRC has 12 months to make enquiries as to eligibility. If it does not make such enquiries, and all information provided is correct, then the EMI option is deemed to qualify.
If a company is too large to grant EMI options, it may still qualify to grant options under a tax-advantaged CSOP. For more information, see our separate Out-Law guide.
If a company or the employee does not meet the qualifying criteria for either EMIs or CSOPs, it can grant share options which have no eligibility criteria and are very flexible, but which are not tax-advantaged and are subject to income tax (and, if appropriate, NICs) on exercise of the share options. Alternatively, the company may consider other arrangements, for example growth shares or the Pinsent Masons' ExSOP™, which may offer a more favourable tax treatment than "non tax-advantaged" options. For more information, see our separate Out-Law guide.