Tax benefits of EMI share options
We've covered the implications of giving shares to director's and employees previously and in this article, we're now going to focus on the tax benefits of EMI share options.
What are EMI share options?
Enterprise Management Incentives or EMI's for short, are share option schemes designed for small and medium-sized companies. Because they have a number of tax advantages they can be a highly effective method of motivating and retaining key staff in your business.
Consequently, having an EMI share option scheme is ideal for a growing small/medium sized business or for a business owner planning an exit/retirement from their business.
An EMI share option scheme works as follows:
What are the tax benefits of EMI share options?
The use of an EMI share option scheme has the following tax advantages:
Unsurprisingly, HMRC impose various conditions which need to be fulfilled in order to obtain the tax benefits of EMI share options.
In view of this, we'll now cover the most prudent steps to take so you reduce the risk of any adverse tax consequences when you set up your EMI share option scheme
EMI share option schemes - practical considerations
The first step is to review whether your company carries out a qualifying trade. A company will not qualify for a EMI share option scheme if it carries out an excluded activity, for example legal or accountancy services and property development.
It may be possible to obtain further certainty by submitting an advance assurance to HMRC who will confirm your company's trading activities qualify, though not whether your proposed EMI share option scheme qualifies as a whole.
Once you've obtained advance assurance from HMRC it will then be a question of drafting and agreeing the terms of the EMI share options. These will set out vesting conditions and any restrictions that might apply and we'll revisit this point at a later date.
At the same time, you'll then need to draft and agree the scheme rules and make the necessary changes to your company's Articles.
Compliance with HMRC
Once any amendments to your company's articles have been made and you've passed the necessary company resolutions, it is prudent to agree a share valuation for the EMI share options with HMRC. This can be done by submitting the form VAL231 to them.
When your company's share valuation has been agreed with HMRC, you should then pass resolutions to issue the shares and adopt new articles for your company, the latter of which should be filed at Companies House.
Having confirmed the terms of the EMI share option scheme the EMI share options will then be granted. At the same time, you should ensure your employee(s) meet the working time requirement.
You'll then need to notify HMRC of the grant of the EMI share options. This must be done within 92 days of the date of the grant of the relevant EMI share options. Failure to do so could result in financial penalties being imposed.
Finally, there will be an ongoing requirement by your company to submit a share scheme return to HMRC annually. Once again, HMRC could impose penalties if these are not submitted on a timely basis.
This article should be regarded as an overview of EMI share option schemes. There are a number of conditions that need to be fulfilled to ensure that an EMI share option scheme qualifies initially and on an ongoing basis. We will be covering these conditions (and the potential pitfalls) in more detail at a later date.
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