How to avoid the pitfalls of Enterprise Management Incentives

When implemented correctly, Enterprise Management Incentive (EMI) share option schemes are a tax-efficient means of rewarding and incentivising key employees. However, these tax advantages can be lost due to errors in implementation, or disqualifying events occurring after the EMI scheme has been successfully set up.

Some of the main reasons for share schemes not qualifying for EMI include:

• Breaching the EMI thresholds – there are several thresholds which, if breached at the point the options are granted, prevent the share options granted from qualifying as EMI. The thresholds which companies need to be mindful of include:

1. the company (or group) having less than 250 full-time equivalent employees;
2. the company (or group) having gross assets not exceeding £30 million;
3. the total value of all unexercised options granted by the company not exceeding £3 million;
4. the total value of unexercised options held by each employee not exceeding £250,000.

• Not registering the EMI options with HMRC – until 5 April 2024, a company had to register the grant of EMI options with HMRC within 92 days of grant. For EMI options granted after 5 April 2024, the deadline to register the grant with HMRC is extended to 6 July following the end of tax year of grant. If the EMI options are not registered by the deadline, they do not qualify as EMI options or benefit from the associated tax advantages.
• Minimum working time requirement – a disqualifying event is triggered if an employee ceases to meet the working time requirement of at least 25 hours a week or, if part-time, spending at least 75% of their working time for the grantor company or group.
• Amending the terms of the option after it has been granted – once an EMI option has been granted, any changes to the fundamental terms of the option which are more than de minimis alterations, could result in being treated as the grant of a new option. This would restart the clock for business asset disposal relief (BADR) with CGT payable at 20% instead of 10% if a sale if anticipated within 24 months of the date the options terms are amended. A new tax valuation would also be needed.

You should understand the rules of granting EMI options properly or get appropriate advice from an expert. Ensuring the EMI options do in fact qualify and deliver the tax benefits that are expected is important, otherwise your employees may be liable for unexpected liabilities when the options are eventually exercised and the gains realised.

Help from the experts

If you are looking to implement an Enterprise Management Incentive scheme or considering amending your existing EMI scheme and would like to discuss the impact, please get in touch with our equity incentive team.