An EMI Options Scheme is a tax-advantaged share options scheme provided by HMRC that allows qualifying companies to give share options to employees in a way that avoids the company incurring a tax liability, and greatly reducing the tax liability for the employee.
The EMI Options Scheme is only available to qualifying companies, which means companies that meet the requirements below.
So, before you get started creating your EMI Options Scheme on SeedLegals, check that your company meets all the requirements below. If in doubt hit the chat bubble to talk to our team.
1. The company must be a trading company
The Company must carry out a qualifying trade.
Here are some examples of what is not a qualifying trade:
- Dealing in land, commodities, futures, shares, securities or other financial instruments.
- Dealing in goods, otherwise than in the course of an ordinary trade of wholesale or retail distribution.
- Banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities.
- Leasing (including letting ships on charter, or letting other assets on hire) or receiving royalties or other licence fees.
- Providing legal or accountancy services.
- Property development.
- Farming or market gardening.
- Holding, managing or occupying woodlands, any other forestry activities or timber production.
- Shipbuilding, producing coal or producing steel.
- Operating or managing hotels or comparable establishments, such as a guest house or hostel, or managing property used as a hotel or comparable establishment.
The qualifying activities for EMI Options are basically the same as for SEIS/EIS, so if your company’s primary business is any of the above then you won’t qualify for EMI or SEIS/EIS.
2. The company can’t be an investment company
If the company carries on any non-trading activities such as holding investments then it won’t qualify.
3. The total value of the company’s gross assets must not exceed £30 million
The gross assets test often confuses people, it has nothing to do with the valuation in your last funding round, instead it means all the assets which would be shown on the balance sheet, without any deduction in respect of liabilities.
- If your company is part of a group, it means the gross assets of the whole group.
- If the company has any subsidiaries, they must all be “qualifying subsidiaries”, being companies of which it holds more than 51%.
4. The Company must have a permanent establishment in the UK
The company must have a permanent establishment in the UK, or, in the case of a parent company, at least one company in the group that is carrying on a qualifying trade must have a permanent establishment in the UK.
5. The company must be independent
A company is under control of another company if the other company has the ability to instruct this company to conduct its affairs in accordance with their wishes, by means of shareholding, possession of voting power or by virtue of powers conferred on it through the company's Articles or other documents.
- If another company can instruct your company to perform its wishes then your company is not independent.
- If another company holds more than 50% of your company’s shares then your company is not independent.
6. If the company has subsidiaries, they must be qualifying subsidiaries
A company is not a qualifying company unless all its subsidiaries are also qualifying subsidiaries at the date of grant of the EMI options.
If any of these are true then your company won’t qualify:
- The subsidiary is less than 51% subsidiary of the holding company.
- Some other person or company has control of the subsidiary.
- There are arrangements in place under which these conditions would cease to be met.
7. The company must have fewer than 250 employees
The EMI Options Scheme is designed for small and medium size businesses, over 250 employees and you won’t qualify.
- Remember that an EMI Options Scheme is designed to give tax benefits to employees, it can’t be used for giving share options to advisors and consultants. So it goes without saying that if you don’t have any employees (or don’t plan to in the next 90 days) then there’s no point setting up an EMI Options Scheme!
8. Your employees must work at least 25 hours per week
Your employees will need to work a minimum of 25 hours per week, or work for your company more than three quarters of their total working time.
- This minimum time commitment doesn’t apply to non-executive directors, they can work less.
9. No employee can own more than 30% of the shares in the company
You can’t give EMI Options to anyone who owns more than 30% of the shares.
- So founders, who usually own more than 30% of the shares when the company is started, can’t get EMI Options, at least not until their shareholding drops, usually as a result of being diluted in later funding rounds.
10. No employee can own more than £250,000 in EMI shares
The total value of shares (at the date of grant) which an employee hold cannot exceed £250,000, or that employee won’t qualify for EMI tax relief on their options.
11. The company must have allocated less than £3M in EMI shares
If the total value of shares in the company subject to EMI exceed £3M then the company won’t qualify for EMI tax relief.
- This last point is an important one to watch out for, it can creep up on you gradually, and then one day when you allocate an employee their share options you realise your existing EMI options now equate to over £3M in shares, and you’re no longer able to offer EMI options to new employees (you can still offer them options without EMI tax advantages, of course – but that can be expensive for both the company and the employee).
Not sure your company qualifies?
If you’re still unsure whether your company qualifies, hit the chat button to talk to one SeedLegals EMI Options experts.
All good? Get started on your EMI Option Scheme now
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