Summary
- EMI share valuations help founders assess the tax implications of employee share options.
- Actual market value accounts for share restrictions, while unrestricted market value ignores those restrictions when testing EMI value limits.
- Founders can request HMRC agreement of a valuation before granting options, but must also check company and employee eligibility.
- This guide explains EMI valuations, option pricing and valuation applications for startup founders in the UK.
- LegalVision’s startup lawyers advise founders on EMI eligibility, share restrictions and employee option terms.
Tips for Businesses
Give your valuer the share terms and supporting company information before preparing the application. Record the proposed exercise price separately from each market value figure. Check for changes affecting share value before granting options. Keep the valuation report and option documents together. Speak to a startup lawyer at LegalVision about documenting share restrictions and option terms.
An Enterprise Management Incentives (EMI) valuation establishes the value of company shares for employee share options. UK startup founders use valuations when designing share incentives to attract and retain employees. The share value helps founders assess option limits and the tax implications of the price employees will pay. Restrictions on selling or transferring shares can affect the valuation, so founders need to distinguish actual from unrestricted market value. This article explains EMI eligibility, valuation applications, grant notifications and how different share values affect option pricing and limits.
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. |
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Actual and Unrestricted Market Value
An EMI valuation can involve two figures: actual market value (AMV) and unrestricted market value (UMV). AMV takes account of restrictions affecting the shares, such as limits on transferring them. UMV ignores those restrictions when assessing the shares’ value.
The distinction affects both option pricing and scheme limits. Founders use UMV to check the value of shares against the relevant EMI limits. AMV helps assess whether the exercise price includes a discount that could trigger income tax when employees exercise options.
For example, assume a professional valuation gives each share an AMV of £2 and a UMV of £3. An option over 10,000 shares represents £30,000 for the EMI value limits. An exercise price of £2 per share would cost the employee £20,000. The lower exercise cost does not reduce the value that counts towards those limits.
When preparing the valuation, identify the share class and explain any restrictions in the company’s documents. Ask the valuer to explain the difference between actual and unrestricted market value in the report. Submit both figures where restrictions affect value, following HMRC’s valuation application guidance. Keep the supporting calculations with the option documents so future reviewers can follow the valuation.
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.
“An EMI valuation needs to match the shares employees will actually acquire. Founders should settle the share rights and restrictions before finalising the valuation, so the option paperwork and valuation tell the same story.”
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.
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
What is the EMI scheme?
The Enterprise Management Incentives (EMI) scheme lets qualifying UK companies offer tax-advantaged share options to eligible employees. Founders can use options to help attract and retain staff. Companies and employees must meet the scheme’s qualifying conditions.
Is HMRC approval necessary for EMI valuation?
No. Founders can grant EMI options without obtaining advance HMRC agreement of the share valuation. However, agreeing the valuation beforehand reduces uncertainty over share value. Companies must still check the other conditions for EMI tax advantages.
What is the difference between actual and unrestricted market value?
Actual market value takes account of restrictions that affect a share’s value, such as limits on transferring shares. Unrestricted market value ignores those restrictions. Founders use unrestricted market value when checking the value of shares against EMI limits.
How long does an agreed EMI valuation remain valid?
HMRC’s valuation agreement normally lasts 90 days from the agreement date. A significant event affecting share value can end that period early. Founders should check for relevant changes before granting options.
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