Chapter 35 Enterprise Management Incentives

Question 1

operation of the scheme and qualifying conditions

Answer 1

EMIs are similar to company share option plans, EMIs tend to be popular with small companies. The company needs to be registered with HMRC before notification can take place and they need to notify the details of the option agreement to HMRC within 92 days.
Operation of the scheme – a company will grant options to an employee; the options give the employees the right to purchase shares within a specified time period at a certain price. The options must be exercisable within 10 years of grant to qualify for favourable tax treatment. The only tax usually charged will be capital gains tax when the employee sells the shares.
Qualifying conditions – the company must be a trading company with a permanent establishment in the UK and must carry on a qualifying trade (financial, legal, farming, property development is non-qualifying trades). The total gross assets of a company cannot exceed £30 million, the total value of shares over which EMI options are held cannot exceed £3 million and the company must have less than 250 full time employees. The company must not be controlled by another company. The company can invite selected, full time employees to participate in the scheme (at least 25 hours). Employees with a material interest (30% of the share capital) cannot participate. The maximum value of shares which an employee holds options cannot exceed £250,000. An element of the tax advantages is lost if the company grants options at a discount.

Question 2

income tax and CGT implications

Answer 2

Tax Implications – there is not a tax charge of the grant of the EMI option. If the option is exercised more than 10 years from the grant, it is treated as a non-taxed advantaged option, the difference between the market value of the shares at exercise and the cost of the shares is charged to income tax. If the EMI option is exercised within 10 years from grant, it qualifies for favourable tax treatment. If there was no discount and the options are exercised within 10 years, there is no income tax charged. If there was a discount offered to the employee at the date of grant, there will be an income tax charge. In all instances there will be a capital gains tax on the employee on the disposal of the shares.
Income Tax at exercise – if there was a discount offered at exercise, the income tax charge is calculated by using the lower of the market value of shares at grant or the market value of shares at exercise less the option price, which gives you employment income which is taxed.
Capital gains tax – this comes into effect when the shares are sold. It is calculated by the difference between the sale proceeds and the capital gains tax base cost (amount paid for shares plus the amount charged to income tax at exercise).