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As a startup founder, you need to attract and retain top talent. One effective way to do this is by offering share options through the UK government-backed Enterprise Management (EMI) scheme. This scheme enables you to grant tax-advantaged share options as part of an appealing compensation package for eligible employees. This article will outline the basics of the EMI scheme, the valuation process, and the importance of HMRC approval.
Understanding the EMI Scheme
The EMI scheme is a government-backed initiative to help small and medium-sized enterprises (SMEs) attract and retain key employees. By implementing the scheme, you can offer your employees share options with significant tax advantages.
Key features of the scheme include that it is available to companies with:
- assets totalling £30 million or less; and
- less than 250 employees.
Only employees who work at least 25 hours per week or, if less, spend 75% of their working time operating for your company are eligible. At the time of grant, the maximum value of share options per employee is £250,000.
EMI Scheme Valuation
Valuation is a critical component of the EMI scheme. When your company grants options, the valuation determines the market value of the share option. This valuation affects the tax treatment of employees’ options. It will determine whether they can benefit from the scheme’s tax advantages when they exercise their options and sell the actual shares.
Valuation is necessary for two key reasons, as the following table outlines.
| Reason | Explanation |
| Tax benefits | A valuation can ensure that your employees benefit from favourable tax treatment. If you undervalue or overvalue shares, this can lead to unexpected tax liabilities later on. The EMI scheme’s tax advantages are a primary reason the scheme exists. |
| Compliance | An accurate valuation is essential for compliance with HMRC guidelines. Incorrect valuations can lead to penalties and employees losing the tax advantages of the EMI scheme. Suppose employees think they can purchase shares at a fixed strike price at a later date and receive Business Asset Disposal Relief (BADR) upon selling those shares. If this is not the case because your company used an inaccurate initial valuation, you are exposed to the risk of legal disputes. |
1. HMRC Approval of the EMI Valuation
HMRC approval of your valuation is not mandatory but highly recommended. It will significantly reduce the risk of future legal disputes and provide certainty over tax treatment and protection regarding the valuation.
Approval will also give your employees confidence that your company based their share options on an accurate valuation and that they will receive the expected tax benefits.
If they decide to purchase shares, exercising their options, they will pay the HMRC-agreed strike price per share. When exercising their share options, HMRC must agree on your initial valuation of the shares at the time of grant. If HMRC disagrees, your employees will not be able to benefit from the scheme’s tax advantages, and this is where you risk costly legal disputes.
To avoid the risk of HMRC not agreeing with the initial valuation, you should seek HMRC’s advance approval by completing the VAL231 form. This form requires you to submit a detailed valuation report alongside it. It is best to seek professional financial advice when completing the form to ensure you complete it correctly and that the valuation is as accurate as possible. Then, you will wait for confirmation. Following approval, the valuation is valid for 90 days, during which time you can grant the share options to your employees.
2. EMI Share Option Grant Notification
You must notify HMRC when your company grants a share option. You must notify HMRC that your company has granted a share option on or before the 6th of July after the end of the tax year when you granted the share.
3. Qualifying Criteria
You must ensure that your company and the employees it grants options to meet HMRC’s qualifying criteria. Failure to meet these requirements can disqualify the share options from the EMI scheme’s tax advantages.
This guide aims to introduce founders to the UK startup market. It provides extensive insights and practical advice on essential steps for launching your startup in the UK.
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Key Takeaways
Understanding EMI valuations is crucial for founders who want to implement the scheme. Accurate and professional valuation ensures that share options qualify for the scheme’s tax advantages. Securing HMRC approval of that valuation provides certainty over tax treatment. Approval also significantly reduces the risk of future legal disputes between your compsany and the employees to whom it grants options.
If you would like legal advice about employee incentive schemes and the legal implications of company valuations, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The EMI options scheme enables companies to offer tax-advantaged share options to their employees. This scheme can help your startup attract and retain key talent.
While not strictly mandatory, you should seek HMRC approval of an EMI valuation. Approval significantly reduces the risk of legal disputes with your employees by providing certainty over tax treatment.
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