Individuals are only eligible for EMI options if they are employees of the company whose shares are the subject of the options, or, in the case of a group, employees of any qualifying subsidiary of that company.
Directors are classed as employees of a company, and so as long as directors meet the criteria set out for employees they will also qualify for EMI. Non-executive directors do not normally qualify.
Working time commitment
Employees are eligible for EMI options only if they are required to spend:
- at least 25 hours each week (the 25 hours requirement), or
- if less, 75% of their working time (the 75% requirement),
working as an employee for the company whose shares are subject to the EMI option or for a qualifying subsidiary. The working time requirement is based on the average working time of an employee, so it can apply to an employee on flexi-time whose hours vary, but whose average working time meets the requirements.
To check if an employee meets the 75% requirement, the total working time needs to be established. The employee’s working time should take into account all remunerative work including employment and self employment. The term employment includes any employment under a contract of service, any employment under a contract of apprenticeship, and any service under the Crown. “Remunerative work” means work from which the income received is taxable as employment income or work undertaken as a self employed person with a view to profit. The earnings and profits are those that are taxable in the UK or would have been taxable if the employee were resident in the UK, (Paragraph 27).
In calculating “working time,” time is treated as working time if it is time that an employee would have been working but for injury, ill-health, disability, pregnancy, childbirth, parental leave, reasonable holiday entitlement or not being required to work during a period of notice of termination of employment.
Calculation of working time examples
A works as an employee of the EMI company for 16 hours a week so he does not meet the 25 hours requirement. He also works as a consultant for 5 hours per week. He does no other paid work. His total working time amounts to 21 hours a week. As 76% of his working time is for the EMI company, he meets the 75% requirement and will qualify the grant of an EMI option.
B works as an employee of the EMI company for 20 hours a week so she does not meet the 25 hours requirement. She also works as a self-employed engineer for 10 hours per week. She does no other paid work. Her total working time amounts to 30 hours a week. Only 66% of her working time is for the EMI company, so she will not qualify for the grant of an EMI option.
In calculating the total working time, any time on sick leave, annual leave, maternity, paternity or parental leave needs to be taken into account.
If employees do not work as much time as they had planned to do and this brings them below the commitment of 25 hours each week, or 75% of their working time, they do not qualify for an EMI option.
If an employee ceases to satisfy the working hours requirement during the year, this is a disqualifying event and the tax treatment of an existing option will be affected.
An employee is not eligible if he has a material interest in the company whose shares are under option, or, if that company is a parent company, in any group company. A material interest is either:
- beneficial ownership of, or the ability to control directly or indirectly, more than 30% of the ordinary share capital of the company, or
- where the company is a close company, possession of or entitlement to acquire rights that would give 30% of the assets, if the company were to be wound up, and make them available for distribution among the participators.
An employee has a material interest if:
- he alone has a material interest in the company,
- he, together with his associates, has a material interest in the company, or
- any associate of his has a material interest in the company, see ETASSUM53060 for the meaning of “associate.”
If an employee acquires a material interest greater than 30% after he has been granted an EMI option, the option he holds will not be affected but he will not be eligible for the grant of any more EMI options.
When testing whether an employee has a material interest, all shares over which the employee has an option have to be taken into account, except shares that are under EMI option, (Paragraph 29).
If any of the company’s shares are held by the trustees of a Schedule 2 SIP then, provided that the shares have not been appropriated to the employee or his associate, these shares are not taken into account in determining the shares to be attributed to the employee or his associate for the material interest test. These shares are still counted as part of the ordinary share capital of the company.
Material interest – meaning of associate
For the purposes of the material interest tests, associate means:
- relatives of the employee, that is a spouse or civil partner, parent, grandparent, child, grandchild or remoter relative in the direct line. However for the purposes of EMI it does not include siblings,
- any partner of the employee,
- the trustees of any settlement in relation to which the employee or any relative is or was a settlor,
- if the company has shares in trust, the trustees of any settlement where the employee has an interest, or
- the personal representatives of a deceased person, where company shares are part of the estate and the employee has an interest in the estate.
Settlement here means a trust. Settlor means the person who provided funds for the trust, (Section 20 ITTOIA 2005).
For EMI, associate does not include the trustees of:
- Schedule 2 SIPs, or
- employee benefit trusts and discretionary trusts, in certain circumstances.
The trustees of an employee benefit trust (EBT) are not treated as associates unless the employee, together with his associates except for the trustees of the EBT, has had a material interest in the company at any time since 13 March 1989. This applies if the EBT is a qualifying EBT in accordance with Section 550 ITEPA 2003.