Enterprise management incentives (EMIs) are a popular way for companies to reward and retain their top-performing employees. These schemes offer tax advantages to both the company and the employee, making them an attractive option for businesses looking to incentivise their staff. However, in order to qualify for these incentives, there are certain EMI qualifying conditions that must be met.
Below we provide a very brief overview of EMI qualifying conditions but the rules are complex which is why offer a free eligibility assessment with a solicitor who specialises in EMI schemes. The first step is to request the EMI Eligibility Questionnaire. This needs to be completed and sent to the solicitor before booking a free consultation. Prior to the free consultation the solicitor will use the information on the questionnaire to assess if you meet the EMI qualifying conditions. During the call he will explain the outcome of the assessment and answer any questions you have about the suitability of the scheme for your business. If your business does not have EMI eligibility he can take you through the most appropriate options, including alternatives such as an Unapproved Share Option Scheme.
EMI Qualifying Conditions: A Brief Overview
Participating 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.
Qualifying Trading Company
Another important qualifying condition for enterprise management incentives is that the company must be a qualifying trading company. This means that the company must be actively trading and not involved in any excluded activities.
Certain company sectors are excluded from enterprise management incentives schemes. These excluded sectors include:
- Property development: Companies involved in property development are not eligible for enterprise management incentives. This includes companies that primarily engage in activities such as buying, selling, or developing real estate properties.
- Financial services: Companies that provide financial services, such as banking, insurance, investment management, or financial advisory, are also excluded from enterprise management incentives.
Geography and Ownership
The company must have a permanent establishment in the UK and must not be controlled by another company.
The company must also have a gross assets value of no more than £30 million. This ensures that the incentives are being given to smaller, growing companies rather than large, established corporations. This is beneficial for both the company and the employee, as it allows for more growth potential and a greater impact on the company’s success.
There are also time limits that must be met in order to qualify for enterprise management incentives. The company must have granted the options within 10 years of its first commercial sale, and the options must be exercised within 10 years of the grant date. This ensures that the incentives are being used to reward and retain long-term employees who have contributed to the company’s growth and success.
The Benefits of EMI Schemes
If you are looking at the EMI Eligibility and the EMI Qualifying Conditions then you are probably already aware of the benefits to an ambitious startup or scaleup company but by way of a brief overview:
One of the main benefits of EMIs is the favourable tax treatment they receive. When employees exercise their EMI options, they usually only pay capital gains tax on the difference between the exercise price and the market value of the shares at the time of exercise. This can result in significant tax savings compared to other types of share options.
Employee retention and motivation
EMIs are designed to reward and retain key employees who contribute to the company’s growth and success. By offering employees the opportunity to become shareholders, EMIs create a sense of ownership and alignment with the company’s goals. This can help motivate employees to work harder and stay with the company for the long term.
EMIs can be an attractive incentive for potential employees, especially for startups and small businesses. The opportunity to receive shares in the company can be a powerful recruitment tool, as it offers the potential for future financial rewards if the company succeeds.
Flexibility in structuring incentives
EMIs offer flexibility in structuring the incentives based on the specific needs and goals of the company. The company can determine the eligibility criteria, such as job roles or performance metrics and set the exercise price and vesting period accordingly.
Alignment with corporate management and leadership standards
EMIs promote a culture of corporate management and leadership by incentivising key employees to take on greater responsibilities and contribute to the company’s growth. This can help create a stronger leadership pipeline and ensure continuity in management roles.
Potential for capital gains
If the company’s value increases over time, employees who hold EMI shares can benefit from capital gains when they sell their shares. This can provide a significant financial reward for their contributions to the company’s success.
Enterprise management incentives can be a powerful tool for companies to attract, retain, and motivate key employees, while also aligning their interests with the company’s long-term growth and success.
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