The Enterprise Management Incentives (EMI) Scheme is one of the most flexible and generous ways to recruit, retain and incentivise UK employees due to its flexibility as well the generous tax advantages.

Due to the pandemic, the rules around EMI options were relaxed until to 5 April 2021. However, the relaxation of the rules have been extended to 5 April 2022, which means employers that already offer EMI share options to employees may need to take steps now to ensure they and their employees retain this lucrative benefit.

Why choose EMI options?

The scheme was introduced specifically for smaller businesses with growth potential to keep workforces engaged by providing an option to buy shares in the business or their parent company with compelling tax advantages.
As an employer, you can decide when and in what circumstances employees can exercise their options - in other words cash in their shares - whilst also setting the price of the shares.

Which employees qualify?

Certain conditions must be met for an employee to be eligible for a qualifying EMI option.

Amongst these is the ‘working time requirement’ which requires an employee to work at least 25 hours per week with the company. If the employee works less hours, then they may still qualify if 75% of their total working time is spent with the employer in question.

The working time requirement rule must be met by the employee until the date they exercise their EMI options to enjoy the full tax advantages.

What are the tax advantages of EMI Options?

EMI options has an impact on an employee’s income tax, national contributions and capital gains tax liabilities if certain conditions are met.

Income Tax & National Insurance Contributions

Employees won’t usually pay income tax or National Insurance Contributions if they decide to exercise their EMI options. In other words, they do not declare the income received in their usual salary.

Employers National Insurance Contributions & Corporation Tax

For the small business owner, there is usually no employer’s National Insurance Contributions to pay. When the EMI options are exercised by an employee, the employer can usually claim a corporation tax reduction, which is calculated as the difference between the market value the shares are sold at and the price the employee pays for the shares.

Capital Gains Tax

Usually when an asset is sold, including shares, by an individual, capital gains tax (CGT ) may be payable. CGT is currently charged at standard rates of 10% and 20%, depending on individual circumstances at the time of the sale.

Shares bought when an EMI options are exercised, however, can benefit from Business Asset Disposal Relief (BADR), a form of tax relief that can cut the top rate of CGT that applies to 10%.

This relief can usually be taken advantage of if the shares are sold at least two years after the option were put in place, the business continued to trade and the employee remained in service throughout that period.

Every individual also benefits from their annual CGT annual allowance currently set at £12,300 in 2021/22 tax year, which could reduce or eliminate any CGT payable too.

Relaxation of rules due to the pandemic

The relaxation of EMI option rules relate to the ‘working time’ requirement’ in response to the changing working environment due to the pandemic.

If an employee is prevented from meeting the ‘working time’ requirement’ due to no fault of their own including being furloughed, employer reduces their hours or taking unpaid leave, their EMI options would remain in place and not be forfeited.

The temporary change was put in place on 19 March 2020 and were originally due to end on 5 April 2021. However, legislation has been brought forward in Finance Bill 2021 to extend this relaxation to 5 April 2022.

What action do employees and employer need to take?

HMRC have confirmed that evidence must be retained to demonstrate a link between the coronavirus pandemic and the relevant reduction in working hours below 25 hours per week.

For employees who have been furloughed under the Coronavirus Job Retention Scheme (CJRS), the furlough agreement between the employee and employer should provide this evidence.

Employees who have taken unpaid leave or who have worked reduced hours, employers should keep a record to demonstrate the link between the pandemic and the reduced hours or unpaid leave, with copes of evidence retained by both employee and employer, otherwise exercising options in the future could be challenged by HMRC or potential buyer of the business.