The six steps to creating an EMI options scheme

How to Set Up an EMI Options Scheme

If you are considering creating an EMI options scheme, you may be concerned that this process of rewarding your team represents a lot of time, complicated paperwork, and difficult communication with HMRC. And with an estimated 50% of new EMI schemes being found non-compliant at the time of exit, you may worry about further costs and issues that only emerge after the scheme is established.

The key approach is to deal with the 6 steps to set up and establish the EMI Scheme https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis

  • Establish your eligibility
  • Create the scheme
  • File for valuation with HMRC
  • Authorise your share pool and receive approval internally
  • Grant EMI options to employees
  • Register the scheme with HMRC

1. Establish your eligibility for an EMI share scheme

You need to ensure you and your team are actually eligible for an EMI share scheme first. Doing this first guarantees that there are no surprises when you file with HMRC.  You need to meet the eligibility requirements for the scheme itself. HMRC lists the main requirements as follows:

  • The purpose must be to retain or recruit employees and not to avoid tax.
  • You may only grant an employee a maximum value of £250,000 in options.
  • The most that a company can grant is £3m in unexercised options at any one time.

Secondly, there are requirements that your business must meet to qualify for EMI:

  • Your company must be independent. More than 50% of the ordinary share capital must not be owned or controlled by another company, either now or in the future.
  • If your company has any subsidiary companies, they must also qualify for EMI.
  • Your gross assets must not exceed £30m at time of EMI options being granted.
  • You must have fewer than 250 full-time employees.
  • Your business must have a permanent establishment in the UK.
  • Your business may not participate in one of the disqualifying industries, including financial activities, property development, farming, or shipbuilding.
  • Third, there are eligibility requirements for employees to participate in the EMI scheme:
  • Employees (or directors) must work at least 25 hours each week or devote 75% of their total weekly working time to the company.
  • Employees must not have a beneficial or controlling interest, directly or indirectly, of more than 30% in the company, either now or in the future.

If your proposed scheme, organisation, and employees meet these criteria, you are ready to proceed.

2. Create the EMI options scheme

If you meet the eligibility requirements, the next step is to create the EMI scheme. This usually involves making decisions on the details, including if it will be exercisable or exit-based and what the vesting schedules will look like for each individual receiving EMI options.

Creating the scheme at this stage will prepare you for the next steps in the process, including filing for valuation and receiving approval from your board and shareholders. It will also help you better prepare to answer questions from your team.  You will eventually register with HMRC, but there are a few other crucial steps to take first.

3. File for valuation with HMRC

At this stage, you will need to file with HMRC to receive a valuation of your business. This process typically takes between two and four weeks from start to finish.  Filing for and receiving a company valuation from HMRC has two major benefits:

  • Recipients of EMI options are confident of their value at the time of exercise, because they are backed by a written valuation by HMRC.
  • Filing for valuation provides some certainty regarding tax treatment going forward for both the business and employees, as long as all due criteria and processes are followed.

You should first have a valuation report carried out for your company. You can do this yourself with the help of an accountant.  Once you have the report, submit it to HMRC via email or post along with a completed VAL231 form. You can find both the VAL231 form and instructions for submission on this page.  This valuation is valid for 90 days from the time at which HMRC have approved it, which will happen via letter. Once you have received it, you are ready to move on to the next step.

4. Authorise your share pool, and receive approval from your board or shareholders

With your valuation you can now create the share pool from which you will issue EMI options to your team.   If you have an advisory board, external investors, or any other existing shareholders, you must also seek their approval at this stage before making any option grants to employees. Most companies require formal approval both from their board and shareholders to set up and execute an options scheme.

Your board and existing shareholders will likely want to review and approve the following items:

  • Number of shares granted to each employee 
  • Whether the options are exercisable or exit only 
  • The vesting schedule(s) involved 
  • Special conditions, if any

Once the board approves the decisions, you can proceed to grant EMI options to your team members.

5. Grant EMI options to your employees

At this stage, you may now grant EMI options to your team members. Upon doing so, you should also be certain to explain the scheme and its meaning to them.   Your employees will likely want to know why you have chosen an EMI share scheme, and how it will benefit them. They may also have some questions about the tax implications of their options, or how to exercise them in the future.

6. Register your EMI share scheme with HMRC

After granting options to your team, you are ready to register your EMI scheme and its granted options with HMRC.   This step must be done within 92 days of any option grants. However, there are multiple steps required, and HMRC may not respond to your registration or any questions immediately, so more time will be needed.  The process of registering is as follows: 

  • Register your EMI options scheme. 
  • Within seven days of notification, you will receive a response from HMRC 
  • Using the scheme set up, notify HMRC about individual employee option grants. 
  • HMRC will confirm that they have received your option grant notifications.

Once confirmation has been received from HMRC, and the option grant notifications, the process is complete. The EMI scheme is now fully established and ready for operation at the organisation.  

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