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Enterprise Management Incentives (EMIs) can help you drive success within your startup. Offering EMI options as part of your employees’ compensation packages can help your business remain competitive and attractive to highly skilled workers, even in the early stages when capital is scarce. These incentives are tax-advantaged share options that employees can exercise, such as purchasing actual shares for a fixed strike price at a later date. However, improperly implementing the scheme can have significant ramifications, such as legal disputes. This article will guide you through the critical aspects of implementing an EMI scheme to ensure compliance and enable you to maximise the scheme’s benefits.
What is an EMI Scheme, and How Can It Drive Success?
The Enterprise Management Incentive (EMI) scheme is a UK government-backed scheme that enables companies to grant their employees tax-advantaged share options. By offering share options, EMIs incentivise employees to remain with your company and commit to its long-term success.
The primary benefit of an EMI scheme is its tax efficiency. Companies can grant share options without using an EMI scheme, but these will be non-tax advantaged.
Key features of tax treatment under an EMI scheme include the following points:
- employees will not pay income tax or national insurance contributions (NIC) when your company grants EMI options or when they exercise their shares; and
- capital gains tax is payable when selling shares, but the options qualify for Business Asset Disposal Relief (BADR).
Legal and Financial Implications of Enterprise Management Incentives
1. Eligibility
To offer EMIs, your company must meet specific criteria. Your business’s gross assets must not exceed £30 million, and it must have fewer than 250 full-time employees. It must also carry out a qualifying trade as businesses participating in certain activities, such as money lending and farming, cannot utilise the scheme.
The employees who can benefit from the scheme must also meet specific criteria. They must work at least 25 hours a week or spend at least 75% of their working time with your startup.
2. Valuation of Shares
Accurate valuation of shares is crucial when implementing an EMI scheme. An inaccurate valuation can lead to unexpected tax liabilities and legal consequences for your company and its employees.
HMRC must approve the value of the shares in advance before granting the options. You should seek advance approval from HMRC before granting any options by completing a VAL231 form. This pre-approval will provide certainty over tax treatment and substantially mitigate the risk of legal disputes further down the line.
3. Setting Up the Scheme
Planning and implementing a compliant EMI scheme requires attention to detail. Before granting any options, you should conduct thorough due diligence.
First, assess whether your company meets the EMI eligibility criteria. Then, consult legal and financial experts to ensure you understand your company’s legal and tax obligations.
Experts can help you structure the scheme properly, assisting you with:
- drafting compliant documents;
- conducting an accurate share valuation; and
- navigating the complex tax implications.
When granting options, you must do so under a written agreement that includes specific terms, including the following:
- the date of grant;
- the number of shares;
- the exercise price; and
- any conditions under which employees can exercise their options.
4. Reporting Requirements
You must notify HMRC within 92 days of granting options. If your company fails to comply with reporting requirements, this can lead to financial penalties and loss of the 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
EMI options are a great way to incentivise your employees and attract talent to your growing startup. Offering options as part of your compensation packages will help your company provide competitive remuneration even when cash is limited. Granting options also helps align employees with your company’s goals and drive for success.
When implementing an EMI scheme, there are several legal considerations you need to consider. These include the following:
- understanding whether your company and its employees are eligible for the scheme;
- getting an accurate valuation of the shares and seeking HMRC approval of this valuation;
- seeking professional advice to help you set up the scheme; and
- adhering to reporting requirements.
If you are considering implementing an EMI scheme in your startup business, 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
EMI schemes can help your startup business attract and retain talented employees by offering tax-advantaged share options. These options can motivate employees and align their interests with your company’s goals.
You should ensure that your company meets the gross asset, employee count, and qualifying trade criteria set by the HMRC. If it does not, it cannot use grant tax-advantaged EMI incentives.
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