One of the UK’s most tax-efficient ways of granting share options to employees is creating the Enterprise Management Incentive (EMI) Scheme. However, if you are considering setting up such schemes, you must be concerned about the challenges. This process is usually lengthy, with complicated paperwork and challenging back-and-forth communication with HMRC.
Additionally, you might have heard that an estimated 50% of new EMI option schemes are considered non-compliant during exit, and this is worrying you about further costs and headaches that will appear once the scheme is established.
However, here is a 6-step EMI scheme set-up and establishment process that businesses in the UK must follow.
- Check and establish your eligibility
- Create the EMI scheme
- File for valuation with HMRC
- Authorise your share pool and gain approval internally
- Grant EMI options to employees
- Register the EMI scheme with HMRC
Before setting up an EMI scheme, ensure you and your team are eligible for such share schemes. By initially doing this, it guarantees that you won’t encounter any surprises when filing with HMRC.
The main requirements for HMRC are:
- The purpose of such a scheme is to retain or employ employees and not to avoid taxes.
- You can grant an employee a maximum of £250,000 in options.
- The highest amount your company can grant at any single time is £3 million in unexercised options.
Now, your business must meet the following criteria to be eligible for the EMI scheme.
- It must be an independent organisation where above 50% of the ordinary share capital is not owned or controlled by another company, presently or in the future.
- If you have any subsidiary companies, they must also qualify for the scheme.
- The gross assets of your company must be less than £30 million when EMI options are granted.
- There must not be more than 250 full-time employees in your organisation.
- The business must be a permanent establishment in the UK.
- Your organisation may not participate in disqualifying industries, including financial activities, farming, property development, or shipbuilding.
Finally, your team must meet certain criteria to participate in the EMI scheme.
- Your employees or directors must work at least 25 hours each week or give 75% of the total weekly working hours to the company.
- These employees must not have any beneficial or controlling interest in your company directly or indirectly of more than 30% either now or in the future.
Now that you and your team have fulfilled all the criteria, you can proceed to the second step.
The next step is to create the EMI options scheme that involves decision-making on the details, including whether the scheme will be exercisable or exit-based and their vesting schedules.
After creating the EMI scheme, you must prepare for the next steps of the process. It includes filing for valuation with HMRC and receiving approval from your board, investors, and shareholders.
You must also prepare yourself to answer questions from your team members and eventually register with HMRC to finish the process.
In the third stage, you must file with HMRC to obtain a business valuation, which takes two to four weeks to finish. It has two significant benefits:
- All the EMI recipients stand confident of their value during the exercise, as they have the written business valuation from HMRC.
- Filling for business valuation offers certainty regarding tax treatment for the organisation and employees going forward until all due requirements and processes are met.
You should initiate a company valuation report by yourself or with an accountant. Then, submit the report and a completed VAl231 form to HMRC via email or post.
You can find instructions for submission and the VAL231 form on the HMRC’s official website. The company valuation, approved by HMRC and sent via letter, is valid for 90 days.
Now that you have the company valuation in hand, you can create the share pool to issue the EMI share options to your employees. You must seek authorisation from your advisory board, external investors, and other shareholders before granting the options to employees.
Most organisations must have formal approvals from the board and shareholders to establish and execute an options scheme.
However, to authorise the scheme, your board and existing shareholders will likely want to review and approve certain factors individually.
- Total number of shares granted to each employee
- Whether the EMI options are exercisable or exit-only
- The vesting schedules for each option
- Special conditions, if any
Once the board approves the EMI options, you can move forward to grant the options to your team.
Now, you can grant EMI options to your team members and explain the scheme and its meaning to them. However, your team will likely ask questions like why you have chosen an EMI share scheme and how it will benefit them.
Additionally, they can ask about the tax implications of their EMI options or how to exercise the scheme in the future.
Once you are done granting EMI options to your team members, you are ready to register your scheme and its granted options with HMRC.
This usually takes 92 days for most option grants for them. However, you need to go through multiple steps, and HMRC may not immediately respond to your registration or any queries, so the time frame may increase.
The registration process goes as follows:
- Login to the Employment Related Services (ERS) website of HMRC and register your EMI options scheme as per the guidelines provided on the page
- Within 7 days of notification, you will receive a response and a reference number from HMRC.
- You must notify HMRC about the individual EMI option grants using the reference number. However, if you are issuing options to 30 employees or more, you need to download and complete their EMI notification template and upload that on the HMRC official website using your Government Gateway user ID and password.
- HMRC will confirm you that they have received your EMI option grant notifications
Your process ends once you receive confirmation from HMRC that they have received your option grant notifications. The EMI options scheme is now completely ready for operation in your organisation.