Rewarding your exceptional team through an EMI options scheme is a brilliant move, but the journey isn’t always a smooth sail.
Amid the excitement of empowering your team and ensuring long term employee commitment, there’s the intricate dance with paperwork, the HMRC communication tango, and the looming specter of compliance pitfalls.
Brace yourself for a rollercoaster that involves hidden fees and post-scheme hiccups, given that a staggering 50% of fresh EMI schemes end up on the wrong side of compliance upon exit.
But fear not, for in this guide, we’ll steer you through these stormy waters and lead you to the treasure trove of team motivation, minus the headaches in simple 6 steps!”
Table of contents:
Why EMI scheme
In today’s competitive business landscape, attracting and retaining top talent is essential for a company’s growth and success. One powerful tool that has gained popularity in recent years is the Enterprise Management Incentive (EMI) option scheme. This scheme not only benefits the company but also empowers employees.
Let’s delve into five key points that highlight the advantages of implementing an EMI scheme.
● Strategic Alignment
EMI schemes facilitate a strong alignment between the company’s goals and employee objectives. When employees hold a stake in the company’s success, they are naturally motivated to contribute their best efforts. This shared interest enhances teamwork, fostering a sense of unity and collective purpose.
● Attracting Top Talent
In the competitive job market, offering EMI options can be a game-changer for attracting and retaining top-tier talent. Prospective employees are drawn to companies that offer not just a job, but an opportunity to become part-owners. EMI schemes showcase a company’s commitment to its employees’ financial well-being, setting it apart from other employers.
● Retaining Employee Loyalty
EMI schemes are a potent tool for retaining skilled and dedicated employees. As employees vest their options over time, they develop a sense of loyalty and a long-term commitment to the company’s success. This helps reduce turnover rates, saving the company resources on recruitment and training.
● Performance Enhancement
EMI schemes act as performance enhancers. Knowing that their efforts directly impact the company’s value and their own financial gain, employees become more engaged, innovative, and driven. This leads to improved productivity and a culture of continuous improvement.
● Tax Benefits
For both employees and the company, EMI schemes offer attractive tax benefits. Employees often enjoy favorable tax treatment on the gains they make from their EMI options. At the same time, companies can avail of tax deductions, making the implementation of EMI schemes a financially savvy choice.
6 steps to setup an EMI scheme
1. Establish your eligibility for an EMI-shared scheme
Firstly, you must ensure you and your team are eligible for an EMI share scheme. It guarantees that there are no costly surprises when filing with HMRC. Listed below are a few HMRC requirements that you must fulfil to be eligible for the scheme.
● The objective of the scheme must be to retain or recruit new employees and not to avoid taxes.
● You can only give an employee a maximum of £250,000 in options
● The maximum amount of grant a company can allot is £3m in unexercised options at any one time.
Secondly, there are numerous other criteria that your company must fulfil to qualify for EMI, like:
● It is an independent company, and more than 50% of the ordinary share capital is not owned or controlled by another company presently or in the future.
● Any company having subsidiary companies qualify for EMI.
● Gross assets up to £30m at the time when EMI options are being granted.
● Up to 250 full-time employees.
● You must have a permanent establishment of business in the UK.
● Your industry qualifies for EMI scheme. Industries which don’t qualify include, financial activities, property development, shipbuilding, and farming.
Thirdly, certain criteria must be fulfilled by your employees to be eligible for EMI:
● Employees or directors must work at least 25 hours per week or offer 75% of the total weekly working time frame to the company.
● Employees mustn’t have any beneficial or controlling interest, directly or indirectly, of above 30% in the company, currently or in the future.
You can only proceed with the next steps if your proposed scheme, company, and workers all meet these criteria.
2. Create the EMI options scheme
The next step is creating the EMI options scheme, which usually involves making detailed decisions, including if it continues to be exercisable or exit-based and what will be the vesting schedules for every EMI option.
This stage involves creating a scheme that prepares you for the next steps in the process. It includes filing for valuation and receiving approval from the board and shareholders. Additionally, it helps you prepare for answering questions from your team, and eventually, you will register with HMRC.
3. File for valuation with HMRC
Now you must file with HMRC to receive a valuation of your business, and that process might take between two and four weeks to finish. Filing with HMRC has two major benefits.
● All recipients of the EMI options scheme can be confident of their value at the time of exercise as they hold a written valuation by HMRC.
● It also provides certainty regarding tax treatment going forward for organisations and employees until all criteria and processes are met.
Firstly, you must have a valuation report carried out for your company by yourself or with the help of an accountant. Then send the report to HMRC via email or post.
Additionally, email a completed VAL231 form with the valuation report at email@example.com. You can also post a downloaded copy of the form VAL231 and the valuation report to HMRC to: Shares and Assets Valuation, HM Revenue and Customs, BX9 1BJ.
This business evaluation is valid for 90 days, from which the HMRC has approved it via an official letter.
4. Authorise your share pool and receive approval from your board or shareholders
With HMRC’s valuation for your business, you can now create a share pool to issue EMI options to your team. However, you must seek approval from your advisory board, external investors, or any existing shareholders before making any option grants to workers.
Most companies get formal approval from the Board and shareholders to establish and execute an options scheme.
However, your board and the shareholders may ask a few things, as listed below:
● Number of shares allotted to each employee
● Whether the options are exercisable or exit-based
● The vesting schedules involved
● Special conditions, if any
Once the board reviews and approves the decisions, you can proceed to grant EMI option schemes to your team.
5. Grant EMI options to your employees
Now you are ready to grant EMI options to your teams and make sure to explain the scheme and its meaning to them.
Your employees may ask you the reason for choosing an EMI share scheme and how it will benefit them.
Additionally, they may ask you about the tax implications of their options or how it will affect them in the future.
6. Register your EMI share scheme with HMRC
After you grant EMI options to your team, you are ready to register your scheme, and all granted options with HMRC.
Make sure you are fulfilling this step within 92 days of any option grants.
However, the HMRC may not reply to your registration or queries immediately, and you may need to go through multiple steps before registration.
Therefore, this stage is time-consuming, and the proceeds like:
● Register your EMI options scheme by login to HMRC’s Employment Related Services (ERS) website and following the instructions on the webpage.
● Within 7 days of notification, you will receive HMRC’s response and reference number.
● Using the scheme set-up and the reference number, you must notify HMRC about individual employee option grants.
However, if you are issuing an EMI option to 30 employees or more, you must follow these:
● Download the EMI notification template from the official website and complete it.
● Then, upload the template using your Government Gateway user ID and password on the HMRC website.
Finally, HMRC will confirm that they received your option grant notifications.
Once you receive the confirmation from HMRC and the option grants notifications, the entire process gets over. The EMI options scheme is now ready to operate in your company.
EMI schemes are a win-win solution for companies seeking to boost their team’s success and employees looking for a meaningful and rewarding professional journey.
These schemes foster alignment, attract talent, retain loyalty, enhance performance, and offer tax advantages, collectively propelling the company toward new heights of achievement.
By navigating the intricacies of EMI option schemes with expertise, businesses can truly unlock the potential of their team and pave the way for sustained prosperity.