Successive governments have recognised the benefits of employees having a shareholding stake in their employer business. The Government is looking at ways of boosting the take up of employee share schemes and has made changes to a number of tax advantaged employee share schemes to increase their reach and simplify the administration of them such as the recent changes to the Company Share Option Plan (CSOP) regime. This blog looks at the recent changes to the EMI scheme.
EMI – short summary
An EMI is a tax-advantaged share scheme, which allows companies to give options over shares to selected employees to incentivise and retain them. Under an EMI, an employee is granted an "option", which is a right to acquire shares in the future at a price reflecting the market value of the shares at the date the option was granted. No income tax nor National Insurance contributions (NICs) are charged on the grant or exercise of a qualifying EMI option provided the option (or "exercise") price is not less than the market value of the underlying shares on the date the option was granted. Capital gains tax would be due on any gain on the sale of the shares, but business asset disposal relief may apply to reduce the rate of capital gains tax to 10% on the first £1,000,000 of gains (subject to conditions).
An EMI scheme is considered to be the UK's "go to" share option plan for qualifying companies given its more generous tax reliefs and flexibility. It is more beneficial than a CSOP and other approved HMRC tax advantaged schemes. An employee may be granted an EMI option over shares worth up to £250,000 (this is the maximum amount within a three-year period) and the maximum value of EMI options over shares a company can grant is £3,000,000.
However, not all companies are eligible to grant EMI options to its employees including those exceeding a certain size, carrying on non-qualifying trades (e.g. financial activities, legal services, farming and property development), or those companies under the control of another company which includes many private equity backed companies. There are qualifying conditions which the employee also needs to meet. You can find more information about the qualifying requirements here.
6 April 2023 changes to EMI
The two changes that have been made to the EMI regime which took effect from 6 April 2023:
- Previously options would not be qualifying if details of restrictions which apply to the underlying shares were not detailed in the option grant documentation. This led to a lot of uncertainty, particularly when companies were being sold, as to whether options qualified. It is no longer necessary to include details of restrictions.
- Previously optionholders needed to sign a working time declaration and for the company to retain a copy of such declaration and make it available. This is no longer required. Even though it is no longer a requirement to make and sign a working time declaration, an employee still needs to meet the working time commitment for the option to be a qualifying EMI option. The employee must meet the following number of working hours: (a) a minimum of 25 hours a week, or (b) if less, 75% of the employee's working time must be for the company.
These two changes apply to EMI options granted on or after 6 April 2023 and to EMI options granted prior to 6 April 2023 but are exercisable after that date.
The retrospective effect of these amendments to existing options may cause the individual and overall company limits on the grant of EMI options to be exceeded. This would be the case if a company which had granted options to an employee prior to 6 April 2023 had granted further options when it subsequently realised the original options were not qualifying EMI options (because it either failed to provide details of the restrictions in the option agreement and/or failed to retain or provide the employee with a working time declaration), and the original options are still capable of being exercised. If a company is in this situation, then it should make arrangements to decide which options should be treated as EMI options on or before 6 July following the year in which the options are exercised. If a company does not make this decision (i.e., which options granted prior to 6 April 2023 should be treated as EMI options without breaching the limits) then the retrospective benefit is to be decided in chronological order in which the options were granted.
These are significant changes to the EMI regime. Previously if a company did not provide details of the share restrictions in the option agreement or failed to retain or provide an employee with a copy of the working time declaration it could mean that the option was not EMI qualifying. This would mean that on the exercise of the option any gain would be subject to income tax and potentially NICs. This is a welcome simplification of one of HMRC's most popular tax-advantaged share schemes, relieving companies of some of the administrative burdens of EMI.
How Brodies can help
Please contact a member of the Corporate Tax & Incentives team if you would like more information or specific advice on choosing the right employee share incentive scheme for your business or if you're interested in implementing an EMI scheme.
