How do I implement an EMI share option plan?

Before the festive season our Enterprise Management Incentive (EMI) series looked at the changes to EMI plans brought in by the Autumn Budget; the benefits that an EMI plan can have for businesses and employees; and some of the most common areas in which businesses make mistakes. If you are considering an EMI plan or have already decided your business should implement one, you might now be wondering how you can set up this kind of plan. In this article we guide you through the steps and highlight why it is important to get them right.

Eligibility

The eligibility requirements for companies implementing an EMI plan are contained in Schedule 5 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”). As well as this, companies – or their representatives – can and should seek advance assurance from HMRC. Advisers such as share plan lawyers can assist with this.

Rules

EMIs were introduced to retain and incentivise employees and can be as simple or as bespoke as each company requires. In order to fully realise the benefits an EMI scheme can have, it is important that companies consider what exactly they want their business to achieve and how the prospective participants factor into this. Collaborating with legal advisers who understand the rationale behind each aspect of an EMI rule can help take the burden off companies and ensure that the final output is fit to achieve the desired aims. This doesn’t need to be expensive, but it is critical to get right. Unfortunately we have witnessed many examples where shortcuts are taken at this stage, resulting in higher costs in the long-run, or complications in any eventual sale of the business.

Implementation

Once the rules have been drafted they must be approved by the company. The requirements at this stage will depend on many factors such as the requirements of the Articles of Association and any Shareholders’ Agreements. For some companies, pre-emption rights will need to be waived, for others specific shareholder consents may be necessary. This means that a number of ancillaries or amendments to existing company documents may be required so it can be useful to have a legal team on board to assist with preparing these.

Valuation

In order for employees to realise the full tax-advantaged benefits of an EMI option, it is vital that the market value of the shares is accurate. While there are statutory rules for London Stock Exchange listed companies, for AIM-listed and private companies, the best way to ensure that there will be no surprise income tax of national insurance liability is to agree a valuation with HMRC prior to granting options. This can be done using the VAL231 form. Many companies benefit from working with a tax advisor or specialist accountant at this stage to help propose a valuation. Although for efficiency many companies elect to run the valuation workstream in parallel with the legal drafting to grant as soon as possible, it should be noted that these valuations are only valid for 90 days, so it is important that when this is received, the business is well placed to implement the EMI plan and grant the options. Further valuations will be required for subsequent grants of options outwith this 90 day period.

Grants

With the rules drafted, scheme implemented, and valuation secured, the next step is to grant options to employees by way of an option agreement. At this stage a company can tailor the vesting conditions to the circumstances of each participant at the time of drafting. A company wishing to improve profitability in an aspect of their business may include performance conditions that mean share options will only vest if a specific turnover goal is achieved, while a company looking to expand into a new sector may make vesting conditional on completion of a specified number of contracts within this field. Advisors supporting the company in the EMI process to this point should have an understanding of the aims of implementing the scheme and will be placed to assist in drafting the terms of the agreement to pursue these aims. Setting aside the contractual process, employee incentives only succeed where employees understand them and their benefits, so communication, and sometimes education, is key here. This communication should continue throughout the life of the option to remind option holders what they have and how they can benefit.

Notification

When a new EMI option is granted, HMRC must be notified by 6 July following the end of the tax year in which the option was granted. If this is the first grant of options made, the scheme will also need to be registered with the PAYE online service. Although this requirement is set to change in April 2027 it remains vital in the interim period to ensure the option does not lose the tax-advantaged status.

Once the initial notification is made there is also an ongoing annual reporting requirement – this is something that will not be changing in 2027. This annual report is required even if there has been no activity but if not completed, will potentially lead to the loss of the tax advantaged status.

If you have any more questions regarding the process to implement an EMI scheme and how your business could start this process, reach out to Shepherd and Wedderburn’s experienced employee share incentives team who can assist you.

This article was co-authored by Trainee Erin Casey.

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