HM Revenue & Customs backed Enterprise Management Incentive (EMI) schemesare widely acknowledged as a real success story; both as far as the Government and growth businesses are concerned. Employees must either work at least 25 hours each week or, if they work less, 75 per cent of their working time. The activities, or part of the activities, of a business. In addition, if a disqualifying event occurs within the first 12 months of the grant of an EMI option, then the EMI option holder will lose the benefit of the 10% rate of capital gains tax via entrepreneurs relief. You usually see this expressed as something like four-year vesting with a one-year cliff. In this scenario, the "one-year cliff" refers to a period of employment that must be completed before any options are vested. CONTINUE READING EMI share option plans: statutory requirements by Practical Law Share Schemes & Incentives This note has been retired and is not being maintained. The purpose of this note is to share with you some of these experiences to increase awareness of the possible pitfalls of EMI schemes. For disposals made before 6 April 2019, this minimum qualifying period is 12 months. Sign-in You can change your cookie settings at any time. **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. Or book a free consultation today to speak to an equity specialist. The relationship between vesting and exercise is different for specified event and time-based options this, in turn, influences the circumstances under which a change to the schedule for the vesting of the EMI option will amount to a change to its fundamental terms and when it will not: in respect of specified event options, changes to the timetable for vesting will typically not amount to a change to the fundamental terms of the option and lead to the grant of a new option. This will ensure that the employee will not have access to sensitive information which an employee could take with them when they leave or tell other colleagues. The Startup Guide to EMI Schemes | Ledgy This makes it easier to submit your return at the end of the year. Add reply. Its free, takes only a few minutes, and will help you understand how to start rewarding your team with equity. Found in: Share Incentives. A common example is an exit-only scheme. The tax market value does not have to be reappraised during the live of the option. See the descriptions disqualifying events on page 2 of this guide and enter a number. on 21 January 2017. Summary of the Option's terms The Option will entitle you to purchase [insert maximum number and type of shares which can be exercised pursuant to the option agreement] shares in the Company at a price of [insert exercise price of shares] per share [if, broadly, there is an 'Exit' event of the Company (which is broadly a takeover of the . It is not acceptable to amend an EMI Option agreement or rules or use discretion to create a new right of exercise, introduce a discretion clause where none existed before or to change the date of exercise, unless de minimis. EMI potential pitfalls - Wright Hassall In such circumstances it is usual for the option holders to join in and exercise their options. In some cases this has resulted in much higher values being used for setting the option price and the reporting of those values to HMRC. In order to exercise fully vested EMI options, the shareholder must: Purchase the shares from your business at the agreed-upon exercise price set when the options were originally granted. Trial includes one question to LexisAsk during the length of the trial. Declare as income in their next annual tax return any difference between the exercise price paid and the tax value agreed with HMRC on award (AMV), if below. If the scheme were exit-only, they would not gain this right. The legislation sets few formal requirements on EMI schemes, the three requirements being that: 'options must be granted for commercial reasons in order to recruit or retain an employee in a company and not part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax.' (para. This is 10 numbers long and issued to the company by HMRC for Corporation Tax purposes. To qualify for the deduction the options need to be exercised before the company is taken over so the timing of when the exercise takes place is crucial. Ensuring that the EMI options can be exercised on a cashless exercise basis (much easier than finding the exercise monies upfront) I could go on but you get my drift. These are likely to be unwanted distractions as part of any subsequent due diligence process. General guidance on completing the attachment Where a question or column does not apply leave the entry blank. The exact consequences of failing to do this are not yet clear. However, in order to benefit from entrepreneurs' relief (ER), subject to the other legislative requirements being satisfied, a minimum qualifying period must have elapsed between the date of grant of the EMI option and the disposal of the shares. if changes are made to the timetable for vesting which do not change the date on which the last of the shares subject to the option may vest, this will be permissible provided that exercise is contingent upon the option having vested in full; when the option may be exercised will not have been altered as a result of changes of this nature. The actual market value (or AMV), on the other hand, takes account of any such restrictions and will usually therefore be a lower value than UMV. 62% of Vestd customers opt for exit-based vesting, making it a popular option among customers utilising an EMI scheme. AIM is not a recognised stock exchange. The employee can then get a deduction equal to the amount of secondary or employers NICs transferred when working out the amount chargeable to income tax. If you agreed a valuation with HMRC then provide the reference number on the attachment. If you are considering setting up an EMI option scheme or one of the other schemes discussed in our previous articles, or if you have any related questions then feel free to get in touch with an expert by contacting Angus Bauer, Partner at Ashfords LLP on a.bauer@ashfords.co.uk. Further guidance on disqualifying events can be found in the Employee Tax Advantaged Shares Schemes User Manual (ETASSUM) at Employee Tax Advantaged Share Scheme User Manual. Failure to be able to point to an agreed valuation from HMRC inevitably leads to questions as to historic market values and the risk that the options may have been granted at a discount or that the EMI limits have been exceeded at grant. If the employees second name is not available then do not make any entry in this column. We may terminate this trial at any time or decide not to give a trial, for any reason. As you grow and potentially obtain external funding or investors, you may issue them ordinary shares. This is because when the option may be exercised, for the purposes of paragraph 37(2)(e) Schedule 5, ITEPA 2003, does not change as even though the timetable for vesting has been altered, exercise will still only be possible upon the occurrence of the specified event. The first decision you must make is, whether you want your issued options to become shares on exit only. The company has not started to carry on a qualifying trade within two years of the grant of the option or preparations to carry on a qualifying trade have ended. AMV is the value of a share or security after taking into account any restrictions or risk of forfeiture. A list of the members (all of whom are solicitors or barristers) is available for inspection at the registered office and at www.michelmores.com, Michelmores wins Corporate Law Firm of the Year at the Insider South West Dealmaker Awards, Michelmores advises Freshways Dairy on merger with Medina Dairy, Michelmores advises Soros Economic Development Fund on the acquisition of Mologic Ltd, Approach HMRC to agree that a cashless exercise will not cause problems for the EMI status of the options (although this may cause timing issues for a transaction); or. If the SPA is a "conditions precedent" contract, the disqualifying event for EMI purposes takes place at completion and this normally does not create an issue. Can an option over newly issued shares still be enterprise management incentives (EMI) qualifying if there is no exercise price payable? EMI Employee Share Options - Keystone Law Another consideration to make life easier when the options are exercised before a take over is to allow the options to be exercised on a cash free basis. For example, if an EMI option is exercisable upon the occurrence of a specified 'exit' event, such as a sale or listing, then an alteration to allow for exercise immediately prior to, and. It also avoids having to buy back shares from employees when they leave the company at a time when the company or other investors may not have sufficient resources to buy back the shares from the employee. Enter a figure from 1 to 8 to tell HMRC which of the following statements is correct: Company has come under control of another company. The firm has noticed a recent surge in the popularity of EMI options as they are a great way to drive recruitment and to incentivise existing staff. It is common for EMI options to be drafted so that they are only exercisable on the occurrence of an exit event. And give you peace of mind. Its contents have been replaced by the following practice notes: Free Practical Law trial To access this resource, sign up for a free trial of Practical Law. Please select all the ways you would like to hear from MM&K: You can unsubscribe at any time by clicking the link in the footer of our emails. Share Option Definition | Legal Glossary | LexisNexis HMRC has provided some useful examples of acceptable and unacceptable use of discretion in the HMRC manuals at ETASSUM54350-54360). Steve is a partner in the corporate team who specialises in transactional work. It is not uncommon for EMI options to be drafted so that they automatically lapse if an employee leaves the company. This involves the creation, change or removal of a right or restriction to which the shares are subject and this change is not for commercial reasons or the change in share capital is made to increase the value of the shares. The exercise of discretion to determine whether a person falls within the definition of a good leaver should be acceptable. Existing user? You can use the ERS checking service to check your attachment. If an employee decides to exercise their fully vested shares, they will be subject to a discounted rate of 10% CGT (as opposed to the standard 20%) when they are eventually sold. Access this content for free with a trial of LexisNexis and benefit from: To view the latest version of this document and thousands of others like it, sign-in with LexisNexis or register for a free trial. Enter the date option was exercised by the employee. We also use cookies set by other sites to help us deliver content from their services. Can an enterprise management incentives (EMI) option be immediately exercised? This can have the effect of re-basing the EMI option with the requirement for a new exercise price to be set (at a potentially higher market value than when the original option was granted) along with further EMI compliance requirements. In this blog we are going to consider what issues to look out for when considering how EMI options inter-relate with the company's exit strategy. Checking your attachments regularly allows you to identify and correct these errors. Since their launch in 2000, EMI has grown to be easily the most widely implemented HMRC backed incentive arrangement (over 85% of all HMRC tax favoured share plans are EMIs) with significant tax breaks and flexibility on offer. In addition, the platform informs both the company and the shareholder about the likely tax implications for them. Robert Lee, who is Corporate Partner at Leamington Spa-based Wright Hassall, takes over from Andrew Nyamayaro as president of the Warwickshire Law Society. In addition, as outlined above, if the exercise price is set below the tax price agreed, then the employee is liable for income tax on the difference, and also NI if the shares are deemed readily convertible at the time (i.e. This meant they were often liable for 28% CGT on any resulting gain, rather than the more attractive 10% CGT with ER. If, from the outset, it is clear as to when and in what circumstances an EMI Option is capable of exercise, the exercise of discretion to accelerate the vesting or to vary or waive a performance-related condition should not be a fundamental change, provided that such exercise of discretion does not bring forward the date of exercise of the EMI Option, The variation or waiver of performance-related conditions for the vesting of an EMI Option on a fair and reasonable basis and in appropriate circumstances following the grant of an option should be acceptable, Complete discretion to choose the circumstances under which an EMI Option may be exercised is unacceptable. Once the exit occurs, the issued options are converted into shares, and employees are able to sell them immediately. Dont worry we wont send you spam or share your email address with anyone. For information about our privacy practices, please visit our website. Provided the exercise of the options are properly structured, the company will have the benefit of a deduction against profits chargeable to corporation tax in the accounting period in which the exercise of the options took place. MM&K newsletter - keeping you up to date with essential industry newsPrivate equity surveyPrivate equity newsletterExecutive RemunerationShare Plans & Share Plan AdministrationGlobal Executive Compensation & Governance newsBoardwalk & other publications from MM&KLife in the Boardroom - chairman & non executive director surveyALL, I accept the privacy policy T&Cs (Read here). Enter the amount put through the payroll for PAYE to 4 decimal places. Can an enterprise management incentives (EMI) option be immediately The option holder now holds more than the maximum entitlement of EMI and Company Share Option Plan (CSOP) options over shares with an unrestricted market value (UMV) as they have been granted an option under a CSOP. There are broadly two common types of EMI option schemes - those that permit exercise only upon the occurrence of a specified event, and those that permit exercise after a defined period of time. This will ultimately help you make decisions about the variables you set for your vesting schedule. This publication is available at https://www.gov.uk/government/publications/enterprise-management-incentives-end-of-year-template/enterprise-management-incentives-guidance-notes. Company has stopped meeting the trading activities requirement. To see a quick explanation of key options terminology like share, share option and option pool, jump down to the key terminology section. Upon exercise, the Vestd platform automates the creation of Companies House documents, the generation of a share certificate, and an update of your cap table. Enter the name of the company whose shares are used to grant the new EMI option.