While the Employee Share Scheme, also known as EMI (Enterprise Management Incentive) schemes are well known for tax benefits for both companies and employees, there are EMI scheme rules that every business should fully understand to remain compliant. EMI legislation has been updated and companies should take legal advice to ensure their circumstances comply with current EMI scheme rules and legislation.
The Employee Share Scheme has benefits for both employers and employees
As explained in our previous article, What are EMI Schemes?, the Employee Share Scheme is an excellent way for companies and their employees to receive certain tax reliefs, such as income tax, national insurance contributions and, for employees, capital gains tax. For the business, there can be advantages for the employer brand. An Employee Share Scheme (or EMI scheme) can help attract talent as part of an employment package.
However, it’s crucial to understand the EMI scheme rules in order to maximise the benefits and ensure compliance.
Eligibility criteria for an EMI scheme
Companies must meet certain criteria in order to qualify for EMI schemes. These include:
- Gross assets must not exceed £30 billion and the company must not employ more than 250 members of staff.
- Firms involved in business activities such as property investing or banking are not eligible.
In addition to these eligibility criteria, there are ongoing EMI scheme rules that companies must adhere to:
- The business must establish clear rules regarding the terms and rules governing the EMI scheme.
- Accurate records must be maintained of all option grants, exercises and share transfers.
- The EMI scheme should be reviewed regularly to ensure that it continues to align with objectives and complies with any regulatory changes.
Employee eligibility and EMI Scheme Rules
It’s also important that businesses understand the rules for employees seeking to participate in the scheme, as not every employee may be eligible.
- Employees must work at least 25 hours per week for the company or, if less, 75% of their working time.
- Employees must not hold more than 30% of the company’s shares or voting rights.
Other legal considerations
There are additional legal implications to be considered regarding the option grant process, option exercise and share transfers, as follows:
- The firm must obtain an independent valuation of shares in order to determine the exercise price of the options.
- HMRC should be notified all within 92 days of all options granted.
- When options are formally granted to eligible employees, full details of the terms and conditions should be made clear.
- Employees must submit exercise notices to the company indicating their intention to exercise options and the company must issue shares to employees upon exercise complying with all regulatory requirements.
It’s also worth pointing out that any shareholder agreements in place may affect the transfer of shares, and existing shareholders may have pre-emption rights giving them the option to purchase shares before these are offered to third parties.
Seek legal advice and get it right
As you can see, the EMI share scheme can get complex. Seeking legal advice from a law firm with experience in this area is essential in order to maximise the benefits and to stay compliant. At JPP Law, we can help with scheme design and documentation, staff eligibility assessment, granting options and the exercise of EMI options, as well as any issues relating to shareholder agreements or share transfers.
EMI Schemes – Free Initial Legal Consultation
What are EMI Share Schemes and how do they work?
Enterprise Management Incentive (EMI) Share Schemes: Major Changes for 2023
EMI Eligibility and the EMI Qualifying Conditions
The Unapproved Share Option Scheme