Recent Complications For EMI Schemes

7 February 2021

Some of the changes that occurred in the past 12 months, as well as some that may soon happen, created some complications with the EMI Scheme.

advice : Employment and Tax

The Enterprise Management Incentive (EMI) scheme was introduced back in 2000, with an initial life expectancy of around five years, but it proved to be so popular with employers and employees that the it is still going strong some twenty years on.

In broad terms, an EMI is a tax-efficient share option scheme designed for smaller companies who are looking to attract and retain key staff by rewarding them with equity participation in the business.

It enables companies to offer share options worth up to £250,000 over a three-year period as an incentive. Under certain requirements, employees pay no income tax or national insurance on the shares, and reduced Capital Gains Tax on disposal.

However, some of the changes that occurred in the past 12 months – as well as some that may soon happen – created some complications with the EMI Scheme.

Covid-19 and the EMI working time requirement

One of the qualifying criteria for EMIs is that employees and directors need to be engaged to work at least 25 hours per week for their company or group or, if less, for at least 75% of their working time.

Based on that, a part time employee can qualify by working say two days a week for the company, provided that work elsewhere does not amount to more than 25% of the whole.

Some participants in EMI schemes have been unable to meet the working time requirement because of reasons connected to the Coronavirus pandemic.

HMRC have confirmed that if an employee would otherwise have met the scheme requirements but did not do so for reasons connected to the Coronavirus pandemic, the time which they would have spent on the business of the company will count towards their working time.

HMRC accept the following as reasons for which an employee may have been unable to meet the working time requirements:

  • furlough;
  • working reduced hours;
  • unpaid leave.

In all cases the reason must be attributable to the current Coronavirus pandemic and the period must have begun on or after 19 March 2020.

Employers and employees must keep evidence to show that there is a link to the Coronavirus pandemic.

EMI Post-Brexit

HMRC have also recently confirmed that EMI schemes will continue to be available after the Brexit transition period ends on 31 December 2020.

Previously, EMI schemes were approved under EU state aid rules and in February 2020 HMRC could only confirm that EMI would be recognised until the end of the transition period. However, HMRC have now stated that schemes will operate from 1 January 2021 under UK law.

EMI Schemes under a revised CGT regime

One of the main advantages of EMI Share Options Schemes is a reduced CGT rate for employees disposing of their EMI approved shares.

If Chancellor Rishi Sunak was to modify the CGT regime in the next budget on 3rd March 2021, the Scheme could lose one of its main benefits for employees.

However, while an upcoming CGT is likely, it’s also likely that EMI Share Options holder will still benefit from reduced rates compared to “unapproved” options and shares.