The EMI Plan
Introduction
The EMI plan is a tax advantaged discretionary share option plan aimed at helping smaller independent companies, with gross
assets of £30 million or less, to recruit and retain high calibre employees.
The plan is very flexible, it is unnecessary to obtain approval from HM Revenue & Customs (HMRC) although it is possible to
apply for advance clearance from the Small Companies Enterprise Centre that a company is eligible to grant options.
Details of the option grants must be notified to HMRC within 92 days of grant and HMRC then has a period within which to
check for compliance with the legislation and to challenge the status of the option.
The EMI legislation was first introduced in the Finance Act 2000 and the most recent annual official statistics from HM Revenue
& Customs (HMRC) show that 2,790 companies offer EMI options, with options granted to 27,000 employees.
Qualifying companies
To be eligible to grant EMI options a company can be quoted or unquoted, need not be UK incorporated but it must:
• be independent (not a 51% subsidiary of another company or controlled by another company or a company and persons
connected to it);
• have gross assets of less than £30 million;
• have only qualifying subsidiaries (it must hold more than 50% of the ordinary share capital of companies it acts together
with others to control so joint ventures can sometimes be problematic);
• satisfy the qualifying trade test (at least one group company must exist wholly or mainly for the purposes of carrying on a
qualifying trade or be preparing to do so, a qualifying trade is a trade carried on wholly or mainly in the UK on a commercial
basis with a view to profit which does not consist to a substantial extent of certain "excluded activities" such as shipbuilding,
steel and coal production and dealing in land or shares or financial activities); and
• have fewer than 250 full-time employees.
Qualifying shares
Shares subject to the plan must be fully paid-up, not redeemable ordinary shares in the company, any restrictions attaching to
the shares must be notified to participants in the option agreement.
Eligible employees
Under an EMI plan, a company has absolute discretion to grant options to any or all eligible employees of the company or its
qualifying subsidiaries.
To be eligible, an employee must work for the relevant company for at least an average of 25 hours per week or, if less, 75%
of the employee’s working time.
An employee who controls, directly or indirectly, more than 30% of the ordinary share capital of the company cannot be
granted an EMI option (the test applies only on grant and shares subject to the EMI option itself are ignored).
The purpose test
Options must be granted for commercial reasons in order to recruit or retain an employee and not as part of a tax avoidance
arrangement.
Limits
The total market value of shares subject to an unexercised EMI option at any time cannot exceed £120,000. Market value is
measured at the time of grant for these purposes. If the individual has any unexercised options granted pursuant to an HMRC
approved company share option plan, these count towards the limit. Once the limit is reached, options may not be granted to
the individual within three years of grant of the last option. Consequently the plan rules should be drafted so the limit is
£119,999 in order to prevent the £120,000 limit being reached.
Any number of employees may hold EMI options but the total market value of all shares subject to unexercised EMI options
granted by the company or group (measured on grant) cannot exceed £3 million at any time.
Option terms
There are few statutory restrictions on the option terms. Options must be non-transferable, must be capable of being
exercised within 10 years of grant and may not be exercised more than a year after death. Options may be granted at any
exercise price or for a nil exercise price. The main terms of the option must be specified in an option agreement.
Disqualifying events
The EMI legislation sets out certain "disqualifying events", which include (amongst other things):
• the company ceasing to be independent or to satisfy the qualifying trade test;
• a participant ceasing employment; and
• altering the terms of an option so as to increase its value.
Tax and NIC treatment of an EMI option
Grant
No income tax or National Insurance contributions (NIC) are payable on the grant of an EMI option provided exercise takes
place within ten years from grant and there has been no disqualifying event.
Exercise
No income tax or NIC are payable on exercise if the option was granted with an exercise price at least equal to the market
value of the option shares at the time of grant.
If a nil cost or discounted EMI option is granted, income tax will be payable when the option is exercised on the amount by
which the market value of the shares at the date of grant (or, if lower, at the date of exercise) exceeds the exercise price.
Where shares are readily convertible assets, income tax will be collected under PAYE and both employer’s and employee’s NICs
will be due. The definition of a readily convertible asset is wide and shares will fall within the definition if arrangements exist
whereby they can be sold for cash or, even if this is not the case, if no statutory corporation tax deduction is available in respect
of their acquisition (see below). Where a NIC liability arises, the company and the option holder may agree that the latter
should bear the liability for the employer’s contributions.
Any increase in the value of the shares between the date of grant and the date of exercise is not charged to income tax
irrespective of whether the option was granted at a discount or not.
Disqualifying event
The income tax and the NIC relief are, however, partially lost if an option is not exercised within 40 days of a disqualifying
event. In that case, income tax and NIC are charged on the amount by which the market value of the shares at the date of
exercise exceeds the market value immediately before the disqualifying event. Thus, the income tax charge is limited to the
growth in value after the disqualifying event. In the case of a nil cost or discounted option, this charge is an addition to the
charge on the discount.
Sale of shares
On the disposal of the shares acquired pursuant to an EMI option, capital gains tax (CGT) may be payable on any gains made,
calculated by deducting the "base cost" of the shares from the net sale proceeds. The "base cost" of the shares is the amount
paid for them (i.e. the exercise price) and any amount assessed to income tax on exercise. A flat rate of 18% applies to gains
after the annual exemption and losses.
Corporate tax deduction
A statutory corporation tax deduction is available on the exercise of options granted pursuant to an employee share plan, such
as an EMI plan, provided that certain conditions are met. The relief is given for the accounting period in which the EMI option
is exercised on the difference between the market value of the option shares on the date of exercise and the exercise price.
This paper is based on the law as at 25 March 2009.
Bird & Bird LLP
15 Fetter Lane, London EC4A 1JP
Tel: 020 7415 6000
About Bird & Bird
Bird & Bird is a full service international law firm and winners of “International Law Firm of the Year 2008”. Bird & Bird’s UK
employee incentives and benefits team is ranked in the UK’s most prestigious legal guides, Chambers and the Legal 500.
For more information or a free initial meeting please contact:
Colin Kendon (Head of UK Employee Incentives & Benefits)
E-mail: colin.kendon@twobirds.com
Direct Tel: 020 7905 6312
Beatrice Chivers (Employee Incentives & Benefits Consultant)
E-mail: beatrice.chivers@twobirds.com
Direct Tel: 020 7982 6519
Catherine Ramsay (Associate)
E-mail: catherine.ramsay@twobirds.com
Direct Tel: 020 7415 6692
This document gives general information only as at the date of first publication and is not intended to give a comprehensive analysis.
It should not be used as a substitute for legal or other professional advice, which should be obtained in specific circumstances.
Bird & Bird is an international legal practice comprising Bird & Bird LLP and its affiliated and associated businesses.
Bird & Bird LLP is a limited liability partnership, registered in England and Wales with registered number OC340318 and is regulated by the Solicitors
Regulation Authority. Its registered office and principal place of business is at 15 Fetter Lane, London EC4A 1JP. A list of members of Bird & Bird LLP and
of any non-members who are designated as partners, and of their respective professional qualifications, is open to inspection at that address.
www.twobirds.com
Beijing Bratislava Brussels Budapest Düsseldorf Frankfurt The Hague Helsinki Hong Kong London
Lyon Madrid Milan Munich Paris Prague Rome Shanghai Singapore Stockholm Warsaw