emi share optionsHMRC statistics show approximately 3,000 companies a year grant Enterprise Management Incentive (EMI) options to employees. They are a proven incentive for employees, and companies that do not offer options may be at a competitive disadvantage in recruitment. If your company has yet to implement an option plan, maybe now is the time to consider it.

EMI scheme and EMI share options

A share option is a right to acquire shares in a company, on terms set out in an option agreement. This will specify how many shares an employee may acquire, how much he or she will have to pay for the shares, and when the shares can be acquired through exercise of the option.  Option exercise may occur, for example, after a specified period of employment, or upon the achievement of performance targets, or upon the sale of the company.

Further more detailed information can be found on our blog: EMI Share Scheme Options: Ultimate Guide

Share Options Comparison

The true comparison is between EMI and unapproved options, where the tax “gain” is obvious.  In the example below it assumes options are granted with an exercise price of £10k, being the market value of the underlying shares as at the date of option grant, and that the shares are sold for £100k immediately following option exercise.

Upfront Share Purchase

  • Share Sale Proceeds = £100,000
  • Capital Gains Tax = £16,000
  • PAYE / National Insurance = n/a
  • £74,000Net Gain

EMI Option

  • Share Sale Proceeds = £100,000
  • Capital Gains Tax = £8,000
  • PAYE / National Insurance = n/a
  • £82,000Net Gain

Unapproved Option

  • Share Sale Proceeds = £100,000
  • Capital Gains Tax = n/a
  • PAYE / National Insurance = £49,000
  • £41,000Net Gain

The upfront share purchase is less unfavourable in tax terms, but would involve the employee having to finance the upfront cost of £10k with no certainty that he or she would ever be able to sell the shares.  Also denies the employer company the opportunity of allowing option exercise only, for example,  upon the occurrence of a takeover or the achievement by the employee of performance targets.

How Goringe Accountants Can Help With Your EMI Scheme

Working with you we will:

  • Determine whether your company qualifies to grant EMI options
  • Design your EMI scheme, including such matters as when EMI options can be exercised, and whether EMI options should be over a separate share class
  • Prepare guidance notes for employee participants and, if required, attend employee briefing meetings
  • Agree an EMI option scheme share valuation with HM Revenue & Customs
  • Review your company’s Articles of Association and, if necessary, make revisions to accommodate employee shareholders
  • Prepare all EMI option scheme rules and option agreements
  • Prepare board minutes and any necessary shareholder resolutions to allow EMI options to be granted
  • Make any necessary filings at Companies House
  • Report the EMI option grant to HM Revenue & Customs
  • Assist you in preparing and filing annual EMI option scheme returns
  • When the time comes, advise on procedures for EMI option exercise and accounting for tax

Looking for specific EMI Scheme advice, or require any tax advice in general?

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