CH 32 - Enterprise Managemetn Incentives (EMIs) Flashcards
What are criteria fo EMIs share option?
- can be given to selected employees over shares worth up to £250,000.
- £3million is max value of shares in a company
- The company must be small trading company with Gross asset up to £30m & below 250 fulltime employees
- no limit on no. of employees who can participate
- those with ‘material interest’ cannot participate (30% o share capital of the company)
- option must be exercised within 10y of grant
There is never any tax charge on the grant of the option.
The rules dealing with tax charges and PAYE deductions on EMI shares are contained in ITEPA 2003, ss.527–541. The rules regarding the operation and administration of an EMI are provided in ITEPA 2003, Sch 5.
What are prohibited trades for EMIs share option to be used?
- financial activities,
- legal services,
- farming and property development.
The rules dealing with tax charges and PAYE deductions on EMI shares are contained in ITEPA 2003, ss.527–541. The rules regarding the operation and administration of an EMI are provided in ITEPA 2003, Sch 5.
What happens on exercise of the an option if within 10y option was granted at a discount under EMIs?
The discount is taxed to income tax on exercise (only if discount at grant);
Lower of:
- MV of shares at grant, &
- MV of shares at exercise
Less: Option price
= Employment Income
The rules dealing with tax charges and PAYE deductions on EMI shares are contained in ITEPA 2003, ss.527–541. The rules regarding the operation and administration of an EMI are provided in ITEPA 2003, Sch 5.
What other tax applies to EMIs than income tax?
There will be a capital gain on the sale of the shares.
The CGT base cost is the amount paid for the shares plus any amount charged to income tax on exercise.
Sales proceeds X
(Less:) Amount paid for shares (X)
(Less:) Amount charged to income tax (X)
= Capital gain X
The rules dealing with tax charges and PAYE deductions on EMI shares are contained in ITEPA 2003, ss.527–541. The rules regarding the operation and administration of an EMI are provided in ITEPA 2003, Sch 5.
What events are ‘Disqualifying events’ for EMIs?
- loss of independece (becomes 51% subsidiary)
- no longer meets the ‘trading activities requirement’
- employee is no longer eligible
- alteration to share capital (changes the value of the shares)
- grant of CSOP option that means that the option holder has more than £250,000 of unexersiced options.
The rules dealing with tax charges and PAYE deductions on EMI shares are contained in ITEPA 2003, ss.527–541. The rules regarding the operation and administration of an EMI are provided in ITEPA 2003, Sch 5.
What can be done with ‘disqualifying event’?
the option can still be exercised but the exercise may give rise to a tax charge
exercised within 90 days from ‘disqualifying event’
- the tax advantages are preserved (only if the option was granted at discount or exercise over 10years)
exercised over 90 days of a ‘disqualifying event’
- the increase in value of the shares between the ‘disqualifying event’ and the exercise is charged to tax.
- income tax is payable (NIC if readily convertible asset)
The rules dealing with tax charges and PAYE deductions on EMI shares are contained in ITEPA 2003, ss.527–541. The rules regarding the operation and administration of an EMI are provided in ITEPA 2003, Sch 5.
How to measure activity of the company
3 points + case study
There is no fixed metric for measuring activity of the company (Assem Allam v HMRC)
but its reasonable to assess;
- number of employees engaged in a specific activity
- contribution to a company’s turnover
- HMRC guidance; where excluded activities account for no more than 20% of the activities of trade as whole, they will accept that they are not substantial.
Assem Allam v HMRC suggested
that a strict numerical test should not be used when determining whether excluded
activities are substantial but rather a more holistic approach looking at what the company
actually does should be used.
