Qualifying Conditions for EMI – Don’t Ask, Don’t Get
In our previous article, we introduced the Enterprise Management Incentive (EMI) as a tool to recruit, incentivise and retain key employees. As the EMI scheme is a Government supported and tax advantaged share option plan, there are a number of qualifying conditions which must be adhered to. In this article, we will discuss the key qualifying conditions for a company to be eligible to grant EMI options.
One of the conditions is that the company issuing the EMI options must carry out a qualifying trade. This means that a trade must exist which is conducted on a commercial basis with the view to making a profit. There are excluded activities, which include banking and property development, but activities of an incidental nature will not disqualify the company from being eligible to issue EMI options. So, what does HMRC mean by incidental? Generally speaking, if the excluded activities make up approximately 20% of the companies activities.
However, it is not always as easy to apply, and our Transaction Tax colleagues considered this in their article. Where a case is borderline due to the magnitude of, for example, non trading turnover, assets, profit or non trade management time, HMRC will assess the position in the round, by looking at all these factors.
We already know that EMIs are generally best suited for small companies, but in terms of size, the company must have less than £30m of gross assets and in a group situation, the gross asset test would be applied to the total group assets. In addition, the company or group must have less than 250 full-time equivalent employees.
Finally, for groups, the company may offer EMI share options to employees employed in either the parent or subsidiary, but the options can only be in the parent company’s share capital and the subsidiaries must be qualifying companies.
If you are considering EMI for your company, and are not sure if your company meets the requirements, you might choose not to go ahead with EMI options, or you might just go ahead and take the risk that HMRC will not check. As with all tax advice, keeping your fingers crossed is never a sensible tax planning strategy. HMRC do offer an advance assurance scheme, and for a modest cost, the risk of your options being non qualifying can be reduced, provided you supply HMRC with the relevant facts.
The penalty for issuing EMI options would be felt by employees when they expected a 10% Capital Gains Tax charge on sale, but ended up with a 46% income tax charge – plus the possibility of National Insurance Contributions on top – if it turns out the company did not qualify to issue EMI options.
Put bluntly – your company may qualify for EMI, but if you don’t ask HMRC for clearance, you won’t know – until, quite possibly, it’s too late!
For more information or advice on Enterprise Management Incentive Schemes, please contact our Employer Solution team.
In our next article, we will discuss the key qualifying conditions for the employee, and for the options themselves.