EMI scheme – Pitfalls to avoid

18 January 2023

The EMI Scheme can be difficult to navigate due the complex rules and process.

advice : Employment

An EMI Scheme allows companies to issue a tax-efficient form of share options to their employees and is perfect for those companies that want to incentivise, retain and attract talent.

Previously, we have talked about eligible companies and employees. Today we would like to talk about the common pitfalls you must avoid when setting up your EMI scheme. 

These errors might disqualify your company from the scheme and, if go unnoticed, will cause trouble during your investment round or exit as well as negatively impact your company’s valuation.

Parent Companies & Non-Qualifying Subsidiaries

The main eligibility requirements for EMI Schemes involve parent and subsidiary companies of the business that is looking to set up the EMI Scheme. 

The qualifying companies must be independent of other businesses, which disqualifies companies that are owned (at 51% or more) by other companies. HMRC’s definition of “independent company” also indicates that there are other rules to take into consideration when directors or “people with significant control” are connected to a corporate shareholder. However, the qualifying companies must have the majority of ownership of any subsidiaries.

Exceeding the EMI Scheme limits

There are limits on the value of options that can be granted under an EMI Scheme. Companies must keep track of how many options are being granted, as well as their value. This will help to ensure that limits are not exceeded.

The current limits are £3m for the whole company and £250,000 for each individual.

Working Time Declarations

As a requirement of every EMI Scheme, option-holders must be working at least 25 hours per week, or – if less – at least 75% of their total working time. The regulations have been updated during the last few years to allow employees on furlough to retain their EMI benefits.

Employees are required to sign a declaration that they comply with working time requirements, and it can’t be backdated. It is important that employers include this statement when setting up an EMI Scheme.

Restrictions summary

Alongside the share options agreement, the employer should include a summary of all the restrictions involved in the EMI Scheme. Those include references to the articles of association and other relevant documentation.

This will help the option-holders be fully aware of the requirements and can ensure that their options are not disqualified. Getting help from lawyers to draft and review your documentation is advised to avoid mistakes.

HMRC process

EMI Schemes must be registered with HMRC, which must be involved throughout the process until the shares are granted. 

Agreeing on the value of the shares with HMRC before setting up the scheme is also vital. If your valuation hasn’t been agreed on, then this could become a serious issue during an exit. 

HMRC approved valuations always have an expiry date. For that valuation to remain valid, your options must be granted before that date.

After granting the options, companies have 92 days to notify HMRC of the grant. Failure of this will likely disqualify the options from the EMI Scheme and option-holders will likely incur higher tax liabilities.

Any changes made to the terms of an EMI Scheme after the options have first been granted may be seen by HMRC as the grant of new options, with potentially negative tax consequences.

Whilst the EMI Scheme brings multiple benefits for both, the company and its employees, it can be difficult to navigate through the complex rules. If you need support to set up this scheme or would like to find out more, please get in touch with our expert team

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.