EMI options Flashcards
What are EMI options
Enterprise Management Incentive options are a type of share option scheme specifically designed for smaller companies in the UK to provide tax efficient employee incentives
What are the company’s eligibility criteria for an EMI scheme
- Company size: gross assets less than £30m
- Employees: less than 250 full time employees
- Private companies
What are the employee’s eligibility criteria for EMI
Must work at least 25 hours per week
Or if part time, 75% of their working time on the business
What are the key tax benefits of an EMI scheme
Grant: No income tax or national insurance contributions are due on the grant date (under a non-EMI scheme these may fall due on grant date)
Exercise: EMI options being exercised does not give rise to income tax and NICs (under non-EMI, employees may have to pay income tax and NICs on the difference between exercise value and market value).
Disposal of shares: EMI shares being sold will attract capital gains on the difference between disposal proceeds and the exercise value, however entrepreneur’s relief may be applicable (10% tax rate up to £1m, as opposed to 20%).
Which business types do not qualify for EMI schemes?
Banking, Insurance, Investment, Property development, Leasing, Farming.
If a business does both, then it depends whether the non-qualifying portion is largest.
What is the accounting treatment
Treated as an equity share-based payment
1) Grant date: calculate FV of options
- E.g difference between exercise price and market value at the grant date is £2,000
2) Recognise expense over the vesting period.
- E.g. vesting over 4 years, Dr SBP P&L £500, Cr option equity reserve £(500)
3) Upon exercise of options: recognise shares exercised.
- Cr share capital, Cr share premium, Dr cash.
- Dr option equity reserve, Cr retained earnings
What are the admin / filing requirements of EMI
- EMI scheme must be formally approved by HMRC through an option agreement, which outlines the terms and conditions of the scheme.
- Adequate records: which employees got what options
- Option grant notification (HMRC)
- Exercise notification (HMRC)
What are the limits to EMI options
Over a three year period, £250,000 worth of shares per individual, which must vest within 10 years
Total issued EMI options cannot exceed £3m
Common pitfalls around EMI schemes?
- Issuing business must be the parent company, so if a business is acquired.
- Company ceasing to meeting the trading activity test
- Employee no longer eligible
- However if options exercised with 90 days of a disqualifying event, then full tax incentives are maintained
What is the personal tax treatment on EMI options?
Grant = non tax event
Vesting = non tax event
Exercise = non tax event
Disposal = capital gains due on difference between disposal proceeds and exercise value
What is a CSOP?
Company Share Option Plan is a share scheme designed for larger companies
What are the CSOP entry requirements and limits?
- Applies to companies of any size
- Limit of options of £30,000 market value at grant date per employee
