How to set up an EMI scheme

After your company has met the HMRC eligibility criteria, you must determine key scheme details, such as employee eligibility, the number of shares, and any vesting conditions. The company can agree on the share market value with HMRC in advance.

Once structured, EMI options are formally granted to employees under a written agreement. The company must notify HMRC within 92 days of granting the options. Proper documentation ensures tax efficiency

When to set up EMI scheme?

An EMI scheme should be set up when a company wants to attract, retain, and incentivise key employees with tax-efficient share options. The ideal timing depends on the company's goals and circumstances, including:

• Early-stage or growth phase – EMI schemes are most effective when the company is growing, as employees can benefit from future increases in share value.
• Before securing investment – Agreeing on share valuations with HMRC before funding rounds can help minimise tax liabilities.
• Ahead of a company sale or exit – If a future sale is planned, an EMI scheme can motivate employees and align them with the company’s success.
• When recruiting key talent – Offering EMI options can make job offers more attractive and competitive.

Timing is crucial to maximise tax advantages and employee engagement.

How long does it take to set up an EMI scheme?

Setting up an EMI scheme typically takes 4 to 8 weeks, depending on company readiness. This includes confirming eligibility, agreeing on share valuation with HMRC (which can take 2–4 weeks), drafting option agreements, and notifying HMRC within 92 days of granting options. Efficient planning can speed up the process.

How to manage EMI schemes

Effective management of an Enterprise Management Incentive (EMI) scheme ensures compliance, maximises tax benefits, and keeps employees engaged. Key steps include:

Maintain accurate records

• Keep detailed records of EMI option grants, including grant dates, exercise prices, vesting schedules, and employee agreements.
• Ensure all documentation is compliant with HMRC requirements.

HMRC notifications and reporting

• Notify HMRC within 92 days of granting EMI options.
• Submit an annual EMI return via HMRC’s online portal by 6 July each year to report any changes, exercises, or lapses of options.

Monitor employee eligibility

• Ensure employees continue to meet the working time requirements (at least 25 hours per week or 75% of their total working time).
• Update records if employees leave or become ineligible.

Manage vesting and exercise events

• Track vesting schedules and remind employees when they can exercise their options.
• Handle option exercises efficiently, ensuring tax implications are clear for employees.

Agree on share valuations with HMRC

• Regularly review and agree on the company’s share valuation with HMRC to ensure options remain tax-efficient.

Plan for exits or company sales

• If the company is sold, ensure EMI options are structured correctly for employees to benefit from tax reliefs like Business Asset Disposal Relief (10% CGT rate after 24 months).

Communicate with employees

• Regularly update employees on their EMI options, tax benefits, and how they can maximise their value.
• Provide guidance on how and when to exercise options.

Proper management ensures compliance, maintains employee engagement, and helps the business and employees maximise the scheme’s benefits.

What are the pitfalls of the EMI scheme?

While Enterprise Management Incentive (EMI) schemes offer significant benefits, there are potential pitfalls businesses should be aware of:

Eligibility issues

• Companies must meet strict HMRC criteria (e.g., fewer than 250 employees, gross assets under £30m, and independent status).
• Employees must work at least 25 hours per week or 75% of their total working time for the company.

Failure to notify HMRC

• EMI options must be reported to HMRC within 92 days of being granted. Missing this deadline could mean the scheme loses its tax advantages.

Incorrect share valuation

• If the share price is not agreed upon with HMRC in advance, employees could face unexpected tax liabilities.

Complex exit planning

• If a company is sold, EMI options must be handled carefully to ensure employees benefit fully from any applicable tax reliefs for example Business Asset Disposal Relief.

Employee leaving before vesting

• Employees who leave before their options vest may lose their rights, making retention planning crucial.

Administrative burden

• Companies must maintain detailed records, submit annual EMI returns, and track employee eligibility to ensure compliance.

Tax implications on discounts

• If EMI options are granted at a discount to market value, income tax and National Insurance may apply when exercised.

By carefully managing these risks, businesses can ensure their EMI scheme remains compliant, tax-efficient, and beneficial for employees and the company.

How Stephensons can help with EMI schemes

Our team of specialist solicitors have extensive experience advising businesses on EMI share schemes. Whether you are looking to establish a new EMI scheme or require assistance with an existing plan, we can provide tailored legal and tax guidance to ensure compliance and effectiveness.

Contact us

If you are considering implementing an EMI scheme or require legal advice on EMI shares, our team is here to help. Get in touch with us today to arrange a consultation.

Call us on 0161 696 6170 or complete our online enquiry form, and one of our specialist solicitors will contact you to discuss your requirements.