Common EMI option mistakes

Throughout this series, we have gone through what an EMI option scheme is, how to launch one, the tax benefits, and how to amend one. In this fifth and final blog entry, we will outline some of the common mistakes we have seen regarding EMI option implementation.

Not registering the EMI options with HMRC

A company must register the grant of an EMI option within 92 days of the grant. If the EMI options are not registered, it is highly likely the tax benefits, being the entire point, to such a scheme will be lost. Why go through the time and expense of drafting and implementing the scheme for it to fall at the final hurdle. Register your EMI options or lose the benefits.

Not checking your company is eligible to grant an EMI in the first place

If your company is growing rapidly, you may reach the employee limit of 250 very quickly, meaning you are no longer able to issue further EMI options. This may disgruntle new staff not able to benefit, or prevent you from enticing new employees from joining the company as the juicy tax efficient benefit is not available.

Not using a proper valuation or using an old valuation

Getting your valuation wrong can be fatal to an EMI scheme. The tax benefits (listed in blog entry 3) on EMI options are applicable to growth in the value of the option shares from the date of grant. If the exercise price is less than the market value of the option shares at the date of grant, the employee may be liable for income tax on the difference. By agreeing with HMRC that no income taxable discount has been applied in advance of the option grant you are mitigating that risk. The valuation is vital to coming to an agreement on what the option shares are worth, and what the company is worth, which is why getting the valuation correct is imperative to ensuring there are no nasty tax bills for employees or companies as a consequence of issuing or exercising.

Not expressly notifying in writing relevant restrictions imposed

There is an imposed duty to clearly notify the employee taking the option of the relevant restrictions imposed on the option shares. This could be things like restrictions on transfer set out in the company’s articles, or forfeiture rules set out in the adopted scheme rules. Ordinarily, these would be included in the options agreement. Failure to clearly notify an option holder of the relevant restrictions may invalidate the EMI tax status, meaning the benefits are lost.

Not taking extreme care when amending an EMI Option

HMRC may take the view that an amendment is the grant of a new option. The danger here is that a new option must include a new calculation of the tax market value of the shares under option. The point of issuing EMI options is that they are tax advantaged remuneration for employees. If the company has done well, HMRC may argue that there has been an increase in the market value of the shares under option, which means the employee will need to pay more tax on them, thereby reducing the remuneration and the benefit of the scheme in the first place. Shares issued under an EMI qualify for Business Asset Disposal Relief (BADR), but only if the option (or shares actually issued under it) have been held for 24 months. BADR under the EMI option schemes is 10%, not the standard 20%, of capital gains tax. If the amended options were considered new options by HMRC, then the clock for BADR would reset meaning you may pay 20% capital gains instead of the intended 20% (until the 24 month period has elapsed).

Conclusion

The purpose of this EMI Option Scheme blog series is to highlight that EMI schemes are a beneficial tax efficient tool for certain companies to use to remunerate and retain staff. Giving employees “skin in the game” by granting tax efficient options over shares will mean employees have a vested interest in its success, and will be more likely to stick around, and less likely to jump ship to another employer.

If you would like to discuss the information outlined in this blog post, please get in touch with Daniel from our corporate team.