Helping you prosper

Enterprise Management Incentive (EMI) Schemes for tech companies

The UK continues to be the European Hub for investment in tech companies with Tech Nation’s 2021 report showing that UK tech VC investment is still the third highest in the world after hitting a record high in 2020. It’s also true that there’s a lot of world-class tech talent working in the UK which is another prime reason to start a tech company in the UK. However, this doesn’t mean to say that attracting and retaining key employees is an easy or inexpensive task. 

One increasingly popular way that tech companies are looking to motivate, retain and key staff is through the use of Long Term Incentive Plans (LTIPs). In our experience, the most often utilised type of LTIP has been the Enterprise Management Incentive (EMI) Scheme. 

How EMI Schemes Work

EMI schemes involve share options – the right to acquire shares in a company at a specified price at a future date. For early stage tech companies, offering high salaries often isn’t an option due to current cash flow and reserves, so equity can offer an attractive alternative.

Employers view offering these share options as a way to create a vested interest from employees in the company’s success akin to shareholders and increase engagement that’s aligned with their company strategy. For employees, whilst they won’t actually become a shareholder until the option is exercised, they’re generally not required to pay anything (other than a nominal sum) when an option is granted and they may benefit from the exercise price being below the market value when the time comes to exercise.

One of the benefits of EMI schemes is the flexibility that it provides employers in choosing the nature of the exercise event. Exercise events can vary from time milestones (e.g. length of service) that increase staff retention to KPIs that improve performance or to a very common exercise event with growing tech companies: an exit. The most common exit is a share sale, where a new owner takes over the company by purchasing a controlling interest in the shares which allows employees to exercise their options. However, other types of exits can occur such as an asset sale where the company sells all its trade and assets to another party.

The implementation of these schemes requires a lot of work from preparing documentation such as the option agreements, agreeing a proposed market value and notifying HMRC of the option awards through to staff communications. Therefore, seeking expert advice and assistance throughout the process would be strongly advised. 

Tax Implications

In terms of how tax is assessed and collected, this will depend on the market value, the exercise price and whether the shares are deemed readily convertible assets (RCAs) at the time of the exercise. RCA status effectively mean that the shares are treated as being readily convertible to cash e.g. just before a sale of the company.

If the exercise price is at least as much as the market value at the time of the option being granted, there is no tax or NI payable when the options are exercised. Alternatively, if the exercise price is below the grant date market value, then tax will be payable (and NIC where shares are readily convertible to cash).

If the shares are RCAs, the income tax will be collected through the PAYE system and employee’s NI will be payable. If the shares aren’t RCAs, the income tax is paid via a self-assessment tax return and no national insurance is payable. If the shares are RCAs when the options are exercised, the company will be required to pay employer’s NI.

When employees sell shares acquired via an EMI option, Capital Gains Tax (CGT) could be payable. This is calculated as the sale proceeds less the exercise price, any costs of sale, any amounts subjected to income tax, and any CGT annual exemption available. Business Asset Disposal Relief may also be available to the employee. Employees will need to pay any CGT via a self-assessment tax return.

Corporation tax relief may also be available for the company where there is an exercise of qualifying EMI options, a deduction equal to any excess of market value of the relevant shares at the time of the exercise over the price paid by the employee being available.

Getting Support

Various factors such as the owner objectives, company situation and scheme eligibility criteria should be considered when deciding on the right scheme and these factors will also need to be borne in mind to get the right specific components of the chosen scheme (be this an EMI scheme or alternative LTIP).

The next steps

For more information on the EMI scheme or other LTIP’s, please contact James Foster on j.foster@uhy-uk.com or your usual UHY adviser.

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