An Enterprise Management Incentive (EMI) scheme can be a great way to attract, retain and motivate key members of your team, allowing them to participate in the growth in value of the company on a sale and perhaps enjoy dividends before then. A qualifying company can grant options over shares on flexible terms and the tax advantage makes an EMI share option attractive to both employees and the companies involved. They must though be granted for commercial reasons (not as part of a scheme or arrangement the main purpose of which is the avoidance of tax).

Does my company qualify?

A company can implement an EMI share scheme if it meets the following conditions:

• It must be independent e. it must not be a 51% subsidiary or under the control of another company (and any person connected with that other company). In addition, there must be no arrangements in place under which the company could become a 51% subsidiary or under the control of another company (for example special rights in the event of default on a loan, or convertible preference shares which could take the holders ordinary shareholding to over 50%. A company under the control of an employee ownership trust will satisfy the independence requirement.

• Any subsidiaries of the company must be qualifying, so the parent company must own at least 51% of the ordinary share capital of all its subsidiaries. The subsidiaries must not be under the control of any other person or company, nor be subject to an arrangement under which the subsidiaries may no longer be qualifying.

• At the time of the option grant, the gross assets of a company must not be in excess of £30m (this includes all assets that would be showing in the balance sheet of the company under Standard Accounting Practices).

• At the time of the option grant, the company must have less than 250 full-time employees (or the equivalent assuming a 35 hour working week)

• The company must be carrying on a “qualifying trade” undertaken on a commercial basis with a view to making profits and which does not substantially consist of excluded activities. Excluded activities which will not count as a qualifying trade include: dealing in land, shares, securities, leasing, legal or accountancy services, property development, farming or market gardening, woodland, forestry or time, hotel or guest houses, nursing or residential homes, shipbuilding, coal and steel production.

• Finally, the company must have a UK permanent establishment.

 If there is any doubt, for example around qualifying trades, the independence test or gross assets, HMRC advance assurance can be sought.

What about my employees?

So once you have established that your company will qualify to grant EMI Options, the next question is whether or not your employees will also qualify. The following conditions apply:

• The employees must meeting the working time requirements, which are set at a minimum of 25 hours per week in the company or 75% of their total working time.

• The employees must not have a material interest in the company granting the option or any of its subsidiaries. For these purposes, a material interest is 30% of the shares or entitlement to more than 30% of the assets on a winding up or other distribution, and the rule is extended to that employees associates including business partners, spouses, parents and children.

• Employees cannot hold unexercised options with a value of more than £250,000 in any 3 year period. For these purposes, any restrictions (essentially buy-back rights which may depress the market value) in place over the shares will be ignored. In addition, any options under a Company Share Option Plan will be included in determining if the value limit has been reached. Any options granted over this value will not be tax-advantaged.

Are there any other requirements?

Within the EMI Option terms, the employees must be prohibited from transferring their rights. If you decide that it would be fair to allow an employee’s personal representatives to exercise the option after the employee’s death, it must not be capable of being exercised more than one year after the date of death.

The EMI legislation includes provisions that deal with EMI options if the company is the target of a successful takeover. In certain circumstances the option holders can agree with the acquiring company to surrender their option in return for a replacement option in the new company.

EMI options only have a life span of 10 years after the date of grant and must be capable of exercise within that period.

Finally, in order to ensure that the EMI options maintain their tax-advantaged status, HMRC must be notified of the grant of the options within 92 days of the date of grant.

For further information on employee share schemes, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com