Enterprise Management Incentive (EMI) schemes continue to be a popular and tax efficient way to motivate and retain key staff. But there are some important dos and don’ts. One mistake could put the tax treatment at risk and will cause problems when due diligence is carried out for a funding round or an exit (sale/listing).
So RM2 have helped put together this 12-point checklist.
- You can grant options to employees that meet the ‘working time’ requirement (25+ hours a week, or, if less, at least 75% of their working time). But you can’t use your EMI scheme for freelancers, consultants, or workers, nor employees who don’t meet the requirements.
- Use up-to-date documents that are fit for purpose. Don’t recycle old ones. Tax legislation and HMRC rules and guidance change. And remember to check performance / vesting conditions work for the business and staff and keep doing so – things change.
- Get the company valuation agreed with HMRC. This is not a legal requirement, but it’s strongly advised. Investors/buyers will ask for evidence when it comes to due diligence.
- Make sure documents are executed in the right format and keep accurate records of all option grants, changes to the scheme, etc. If you don’t have someone that knows what they’re doing, outsource to someone that does – it is not a simple admin task.
- Ensure the company is independent, and stays that way. Companies with a parent/ holding company won’t usually qualify for EMI. Nor will those with a corporate investor that imposes too much control, e.g. by way of veto rights or board control.
- Give staff FAQs and/or an explanation of how the scheme works, and point them in the direction of guidance, e.g. on HMRC’s website. But don’t give them financial or tax advice, that should be provided by someone independent.
- Don’t give away too much too soon. You’ll need to take future employees into account, especially key hires.
- Don’t make promises about the value of options or the % ownership. The value will fluctuate over time, and the % will be diluted by future option grants and funding rounds. Otherwise, you could end up with a very disgruntled employee, and potentially a legal claim.
- Don’t recycle old option documents (so important – and common – we’re saying it twice!). And definitely don’t put options into employment agreements or even in an offer letter. It won’t work.
- Don’t forget to register options with HMRC. You must do this online within 92 days of the date of grant (next year this will change). And keep a record of the registration.
- Don’t forget that consents might be required for granting options and/or for grants above a certain limit – check your articles of association, investment/ shareholders agreement and any other relevant governance documents.
- Don’t forget that tax treatment can change. The 23/24 capital gains tax exemption is £6,000, but next tax year it will reduce to £3,000. The tax treatment of dividends is also changing – from £1,000 this year to £500 next year. Depending on the design of your EMI and the tax status of EMI participants, these changes may impact on employees.
LegalEdge works with specialist share plan advisers like RM2 Partnership. If you would like to discuss setting up an EMI Share Scheme or would like advice on your existing scheme you can get in touch with us on email@example.com