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A simple EMI plan is designed to give equity to employees in early stage, high growth companies. On a successful exit, the tax reliefs attaching to an EMI plan could save millions in taxes compared to exit bonuses of similar value. A simple EMI plan is designed so that:

• The deal is as simple as possible for employees – if they stay with the business up to a sale, they will receive a share of the proceeds from that sale. The sale must happen within ten years.
• If an employee leaves, you have flexibility on how to treat that employee.
• The employee must pay all taxes due on the option.
• The options could benefit from a government tax relief under the ‘Enterprise Management Incentive’ or ‘EMI’ code (hence an ‘EMI’ option). This could reduce the effective tax rate on the options from as high as 67% to 10% or less.
• The documents are written in plain English.

As part of the administration of the plan, Granted will:

• Register your plan and the options you have granted to your employees with HMRC.
• Inform you if there are changes to legislation which may impact on your EMI plan.
• Be available to answer simple queries about your EMI plan.

Granted maintains a team of company secretaries, solicitors, tax advisors and corporate finance advisors to help with the full range of advice relating to employee share schemes and employee ownership. Granted’s aim is to answer simple queries as part of the administration service and give you guidance on any next steps. If advice requires detailed analysis, data collection, review of documents, drafting or amending documents or HMRC or companies house filings, we will agree with you to charge this separately. The hourly rates for Granted team members are £175 to £325 per hour, plus VAT, depending on specialism and experience. Typical additional work would be advising on how the plan and its tax treatment could be affected by changes to the business or share capital structure, valuations, selling the business to an employee ownership trust, acquisitions of other business, leavers and the sale of the company or business.

The are a variety of events that could impact on the tax treatment of the plan, require changes to your plan’s records or require filings to be made. It is impossible to provide an exhaustive list of when you should contact Granted for guidance, but as a minimum you should contact Granted (by phone or email) in any of the following events:

• Events relating to employees:
  • Making an offer of equity to a new joiner.
  • Granting new options.
  • Creating a new employee share scheme or awarding shares outside of the plan.
  • When an employee leaves.
  • When an existing option holder reduces their working hours.
• Events relating to the business:
  • Acquiring another business, company or non-trading asset.
  • Entering into a joint venture.
  • Significant changes to the company’s trade.
  • Changes to the share capital of the company.
  • Fundraising.
  • An exit.

The value of shares in your company (valued at the date you give an option to an employee) has an impact on two things under a simple EMI plan:

• How much tax option holders pay (a higher value may result in higher tax).
• How many options have favourable tax treatment (a higher value may result in fewer options having favourable tax treatment).

Why does the value affect how much tax is paid?

Income tax and national insurance contributions are a percentage of the difference between (a) the value of the shares when options are given, and (b) the amount employees are required to pay for the shares on an exit. The lower the value of the shares, the less the tax to be paid.

Why does the value affect how many options have favourable tax treatment?

The favourable tax treatment only applies to the first £250,000 of shares per person, and the first £3m of shares for the whole company.

When should you value the shares?

You can normally value your shares after you have given out options. However, if you only want to give out options within the £250,000 or £3m limits, or the value of shares will affect the number of options you give to your employees, you should consider valuing your shares before giving out options.

Who can value the shares?

The board of the company must make a reasonable estimate of the value. HMRC provide a guide to valuing shares here. You can write to HMRC to agree to this value. Your accountant may be able to help you with this valuation. If you would like further help with valuing your shares, please contact us.

What is an EMI plan?

A set of rules (contained in a set of documents created for each company) under which you can give options to your employees. Your plan must meet the conditions of the EMI code to be an EMI plan.

What is the EMI code?

The government has created the ‘Enterprise Management Incentive’ or ‘EMI’ code, which sets out some conditions. If your plan meets these conditions, your company and employees can receive favourable tax treatment. The EMI code has conditions about the companies which can give an option, the employees who can receive an option and about the option itself.

What is an option?

An option is an agreement normally between your company and each employee. Under that agreement, each employee has the right to buy a set number of shares for a set price. The agreement will specify when that right can be exercised.

Which companies can set up an EMI plan?

Any company which meets the conditions of the EMI code. Broadly, your company must be an independent small or medium sized company which trades in the UK. If you sign up to Granted, you can answer a questionnaire to find out if your company is likely to meet these conditions.

Who can be given options under an EMI plan?

Broadly, any employee who is committed to work for a significant amount of time for your company, and does not already hold a material interest in your company. If you sign up to Granted, you can answer a questionnaire to find out if your employees are likely to meet these conditions.

What type of shares can bought using an EMI option?

This can sometimes be a difficult question. If you have not made any changes to the structure of your shares since your company was established, it is likely those shares can be used in an EMI plan. If you sign up to Granted, you can answer a questionnaire to find out if shares in your company can be used in an EMI plan.

Is there flexibility on what the rules of the EMI plan say?

Yes. The key requirements of the EMI code are that an option expires after ten years, the terms of the option must be in writing and that the option cannot normally transferred by the employee to others. Beyond these requirements, the EMI code allows a lot of flexibility as to what the rules say. The simple EMI plan offered by Granted has been designed for early stage companies with a high potential for growth. If you would like further flexibility or a bespoke design, contact us to hear about our premium services.

What is the favourable tax treatment?

The option is tax free until the option is exercised. When the option is exercised and the shares sold, the tax treatment depends on the value of the shares when the option was given to the employee (the ‘initial value’):

• The amount received by the employee above the initial value is taxed at 10%.
• The amount received by the employee below the initial value is taxed as if it was salary (so subject to income tax and national insurance contributions).

This assumes the shares are sold at the same time as the option is exercised, and that the option is held for at least 12 months. The tax treatment is a little more complicated if this is not the case.

Is the favourable tax treatment guaranteed?

No. If the conditions of the EMI code cease to be met, the favourable tax treatment may be lost.