If you landed on this article, you're likely already familiar with Enterprise Management Incentives or EMI options scheme. Need a refresher? Read our startup founder's guide to EMI schemes
Creating an EMI option scheme can be a tricky and time-consuming process for company founders. That’s why we’ve created this simple 6-step guide that should clarify the process and help you get your EMI scheme registered with HMRC as smoothly and swiftly as possible.
Step 1. Establish your company's eligibility
First thing you will need to do is determine whether the company and your team are eligible. The criteria to qualify for an EMI Scheme are:
- The purpose must be to retain or recruit employees and not to avoid tax.
- You may only grant an employee a maximum value of £250,000 in options.
- The most that a company can grant is £3m in unexercised options at any one time.
- Your company must be independent. More than 50% of the ordinary share capital must not be owned or controlled by another company, either now or in the future.
- If your company has any subsidiary companies, they must also qualify for EMI.
- Your gross assets must not exceed £30m at time of EMI options being granted.
- You must have fewer than 250 full-time employees.
- Your business must have a permanent establishment in the UK.
- Your business can not participate in one of the disqualifying industries, including financial activities, property development, farming, or shipbuilding.
- Employees (or directors) must work at least 25 hours each week or devote 75% of their total weekly working time to the company.
- Employees must not have a beneficial or controlling interest, directly or indirectly, of more than 30% in the company, either now or in the future.
Step 2. Design the EMI scheme
Once you have established your company's eligibility, you can create a scheme which qualifies as an EMI when filed with HMRC. Cake has industry best-practice templates ready and available to use when you sign up today.
The main decisions to be made in this step is whether the details, including any restrictions on shares, are exercisable or exit based, and how the vesting schedules will look for each individual option holder. By having a clear idea of what your EMI scheme details will look like, you will be able to tackle the next steps with ease!
Step 3. Company valuation and filing for HMRC approval
The next step is to ensure that your business files with HMRC to receive approval of your valuation for your scheme.
Once the valuation is processed and agreed, it is valid for 90 days from the date of approval. This step commonly takes between 2-4 weeks. Although it’s not mandatory, we strongly recommend you do it! The benefits that you will receive from getting your valuation approved by HMRC are two-fold:
- Providing the EMI Share Scheme recipients with confidence in the value of their options at the time of exercise; and,
- Providing clarity for your company and the employees receiving EMI options on tax treatment.
You can get a compliant valuation report for your company with the help of one of our trusty valuation providers. If you’d like an introduction, just let us know by filing out the form here! This report then needs to be emailed to HMRC along with the VAL231 form which can be accessed here.
Once you've completed the form, download a copy and submit it to the HMRC for review by emailing a copy of the completed VAL231 form along with your valuation report to firstname.lastname@example.org.
You can also submit by post by writing to:
Shares and Assets Valuation
HM Revenue and Customs
Step 4. Authorise your share pool
You may have already authorised your option pool prior to issuing your UK-based employees options. However, depending on your governing company documents (think articles of association, constitution and shareholders agreements), you may need to get further approvals and authorisations.
For the UK, the common items that need review and approval are:
- Number of shares granted to each employee
- Restrictions on options
- Vesting schedule(s)
- And any special conditions
As soon as approval is obtained, the pool is now authorised and your options are ready for granting!
Step 5. Grant the options to your employees
You can now grant the options to your employees!
To do this on Cake, simply login to your Cake account and go into the ‘Options’ tab, click on the relevant option pool, create an offer within your pool and hit send!
Ready to set up your EMI options scheme?
Step 6. Register your EMI scheme and option grant with HMRC
Once steps 1-6 are completed, you are ready to register your EMI scheme and its recipients with HMRC. This process must be completed within 92 days of the option grant. By not submitting the notification within the 92 day limit, companies risk losing any tax benefits for them and their employees.
This process can be time consuming so we recommend that you start this process at least two weeks before granting the options.
- Login to HMRC’s Employment Related Services (ERS) website and Register Your EMI option scheme. Follow the guidelines on this page if you need a hand.
- You will receive a response and reference number from HMRC within 7 days.
- Using the reference number, notify HMRC about the individual employee option grants. If you are issuing option to 30 employees or more, you will need to:
- Download and complete the EMI notification template.
- Upload the template. You’ll need the Government Gateway user ID and password - this can be found and created on the HMRC website.
Once you’ve completed the above, HMRC will confirm that they have received your option grant notifications. And you’re done!
If you need assistance with any of the 6 Steps, just let us know by filling out the help request form here.
This article is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.