As with all tax-advantaged arrangements, an EMI (Enterprise Management Incentive) option must not be granted as part of a scheme or arrangement the main purpose of which is the avoidance of tax, and as such must be implemented for commercial reasons. EMI Options can be a powerful way to attract, retain and motivate key employees, giving them the ability to participate in capital value on a sale of the company, and to enjoy dividends if the scheme is designed with this in mind. To be able to grant EMI options though, there are a number of statutory requirements that will need to be satisfied:

The Company

For a company to grant EMI options, it must:

• Have a permanent establishment in the UK.
• be carrying on a “qualifying trade” on a commercial basis with a view to making profits. There are a number of trades which are deemed to be excluded activities, and the trade of the company must not substantially consist of any of them in order to quality. Examples of excluded activities for these purposes include: dealing in land, leasing, property development, shares, securities, legal or accountancy services, farming or market gardening, woodland, forestry or time, hotel or guest houses, nursing or residential homes, shipbuilding, coal and steel production.
• The gross assets of a company must not be in excess of £30m.
• The company must have less than 250 full-time employees (or equivalent assuming a 35 hour working week).
• Any subsidiaries of the company must be qualifying, i.e. the parent company, if there is a group structure, must own at least 51% of the ordinary share capital of all its subsidiaries.
• It must be independent e. the company itself cannot be under the control of another company. In addition, there must be no arrangements in place under which the company could become a subsidiary or under the control of another company. The only quirk to this rule is if a company under the control of an employee ownership trust.

The Employees

The employees to who you are granting EMI options must:

• meet the working time requirements, i.e. they must work a minimum of 25 hours per week in the company or 75% of their total working time.
• not hold unexercised options with a value of more than £250,000 in any 3 year period. When valuing unexercised options, any restrictions on the shares, for example buy-back provisions which may depress the market value, should be ignored.
• not have a material interest in the company e. 30% of the shares or entitlement to more than 30% of the assets on a winding up or other distribution. This requirement also extends to the associates of an employee, which includes business partners, spouses, parents and children.

Anything else?

There are a number of requirements in relation to the EMI Option agreement itself. These include, for example, the transferability of rights on death (in which case an option must be exercised by an employee’s personal representatives within 12 months of the date of death otherwise the tax-advantage will be lost).

EMI options only have a life span of 10 years and must be capable of exercise within that period. After this time, the options will lapse.

Finally, in order to ensure that the EMI options maintain their tax-advantaged status, HMRC must be notified of the grant of the options within 92 days of the date of grant.

For further information on employee share schemes, please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email everyman@everymanlegal.com