Whilst an EMI scheme has great tax and commercial benefits, there are many traps into which unwary advisers and companies can fall. Here are some of the main ways EMI benefits can be lost:
1. Don’t register the scheme and options
Both the scheme and the options granted must be registered with HMRC within 92 days of the options being issued. Failure to make this notification will mean the tax benefits of EMI are removed.
2. Don’t agree the share valuation with HMRC
It is not compulsory to agree a share valuation with HMRC. If, however, this is obtained then this provides certainty over the tax treatment for the employee.
This is because the EMI rules state that there is no income tax on exercise of a share option (ie turning it into actual shares) provided the exercise price is no lower than the market value at the date of grant of the option. As such, if HMRC seek to argue that the market value was higher than the exercise price, income tax may be due. Obtaining an advance agreement of the market value at the date of option grant removes this risk.
3. Issue the options more than 90 days after HMRC have agreed the valuation
Once a valuation is agreed with HMRC it is valid for 90 days. At the time of writing, the validity period has been extended to 120 days due to the Covid-19 pandemic. Options issued after this period has expired are not covered by the valuation and a new agreement should be obtained before further options are issued.
4. Don’t ask your employees to sign a working time agreement
Employees must provide a written declaration that they meet the requirement of working for the company for 25 hours per week or more, or at least 75% of their total working time if less than 25 hours. This can be a separate agreement or form part of the option agreement. If not sent by email, a copy of the declaration must be given to the employee within 7 days of signature.
5. Don’t deal with disqualifying events promptly
The tax advantages of EMI can be lost if the option is not exercised within 90 days of a disqualifying event. Such events include the EMI company becoming controlled by another company, the employee ceasing to meet the working time requirements and certain changes to the EMI shares or option terms which may mean that the value has to be renegotiated. If options are not exercised within 90 days of such an event, additional tax liabilities may arise.
