News stories, speeches, letters and notices, Reports, analysis and official statistics, Data, Freedom of Information releases and corporate reports, beta Another example of a specified event could be cessation of employment. Since their launch in 2000, EMI has grown to be easily the most widely implemented HMRC backed incentive arrangement (over 85% of all HMRC tax favoured share plans are EMIs) with significant tax breaks and flexibility on offer. As part of the mechanics, do shares actually have to be issued/transferred to the optionholders in order for those shares to then be sold to the purchaser? A common example of a discretion clause in time-based EMI schemes would be one which allows for the acceleration of vesting subject to the discretion of the board; however, whether a use of discretion in this specific way would be permissible in accordance with the principles from the Eurocopy and Reed International cases would depend on when the option is exercisable. To qualify for the deduction the options need to be exercised before the company is taken over so the timing of when the exercise takes place is crucial. If any potential variations are likely post-grant then as an attempt to future-proof the options it is advisable for the EMI documentation to provide sufficient wriggle room. We also use cookies set by other sites to help us deliver content from their services. Employees must either work at least 25 hours each week or, if they work less, 75 per cent of their working time. Dont include personal or financial information like your National Insurance number or credit card details. It goes without saying that a buyer will conduct careful diligence on the scheme to ensure it is confident not only as to the number of options to be exercised, but the process involved and the EMI status of the relevant options being exercised. Can an option over newly issued shares still be enterprise management incentives (EMI) qualifying if there is no exercise price payable? Incentives and share schemes. As with takeovers and business sales we would normally recommend that the rules set out a time period as to when the options are exercised by and if not exercised they lapse. We use some essential cookies to make this website work. EMI options are intended to help smaller companies with growth potential to recruit and retain the best employees. It is not uncommon for EMI options to be drafted so that they automatically lapse if an employee leaves the company. Another change which had effect from 6 April 2014 and which also represents a compliance risk is the form and process for employees to certify that they meet the 25 hours a week/75% of paid time working time EMI requirement. The options must be capable of exercise within 10 years of grant. We also use cookies set by other sites to help us deliver content from their services. This publication is available at https://www.gov.uk/government/publications/enterprise-management-incentives-end-of-year-template/enterprise-management-incentives-guidance-notes. We have encountered a number of EMI companies over the years who have failed to satisfy this final (but all-important) step of the EMI process. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk. The updated guidance should assist share scheme practitioners going forward with both the drafting of the EMI plan rules as well as advising clients on the exercise of discretion. However, where the SPA is conditional (i.e. While not an issue in terms of compliance, a common misunderstanding is that the exercise price of an EMI option must be set at not less than UMV in order for EMI options to secure their full tax efficiencies - when in fact it is the lower AMV that is relevant for these purposes. The market value of shares under EMI options can be agreed with HMRC in advance of the date of grant of options. This is linked to the distinction between fundamental terms and performance conditions which is referenced in ETASSUM54310. An exit event could be the sale of all the shares in the company; a change of control; a business sale or a listing on a stock exchange. See the descriptions of disqualifying events on page 2 of this guide and enter a number. Article produced in partnership with Angus Bauer and Rory Suggett at Ashfords. By clicking below to subscribe, you acknowledge that your information will be transferred to Mailchimp for processing. 2023 Vestd Ltd. Company number 09302265. Use this worksheet to tell HMRC about options that have been adjusted in the tax year. Similar issues are faced by the second category of at risk companies; those who, despite having obtained HMRC agreement to a valuation, grant their options outside the typical 60 day HMRC approval window. All values should be entered in pounds sterling and pence and entered to four decimal places. It is very rare to award options to employees without vesting. Has definitely saved us hours of work.. In respect of time-based options that are exercisable on specified events, the exercise of a board discretion to allow the exercise of an option to a greater extent than vested should be acceptable. Obtaining agreement from HMRC provides much greater certainty on the likely tax treatment of the options and also that any grants are within HMRCs EMI limits. You may consider exceptions if your share scheme is being started several years into the life of the company, and if there are those who have made significant contributions deserving immediate equity. For information about our privacy practices, please visit our website. EMI Options can be granted over up to 250,000 worth of shares to each individual, subject to a 3 million overall limit for each company. Two different share valuations are relevant to EMI options. This can have the effect of re-basing the EMI option with the requirement for a new exercise price to be set (at a potentially higher market value than when the original option was granted) along with further EMI compliance requirements. The exercise of discretion to determine whether a person falls within the definition of a good leaver should be acceptable. However the EMI documentation may not allow for exercise until immediately before completion. Options issued as part of an EMI scheme become exercisable when the assigned vesting schedule has been completed or an exit has occurred (if exit-only). Can a non-executive director or consultant be a beneficiary under an employee benefit trust? Sign up to the right if youd like to keep updated on MM&K and our services & news publications, MM & K Limited, 1 King William Street, London, EC4N 7AF. Likewise we would normally recommend that the directors set out a time line by when the options must be exercised by the option holder otherwise they lose their options. MM&K newsletter - keeping you up to date with essential industry newsPrivate equity surveyPrivate equity newsletterExecutive RemunerationShare Plans & Share Plan AdministrationGlobal Executive Compensation & Governance newsBoardwalk & other publications from MM&KLife in the Boardroom - chairman & non executive director surveyALL, I accept the privacy policy T&Cs (Read here). However our experience from recent M&A transactions is that the existence or proposed implementation of EMI schemes often leads to issues that need resolving. AMV is the value of a share or security after taking into account any restrictions or risk of forfeiture. Enterprise Management Incentive (EMI) options are a type of employee share option which are subject to favourable tax treatment, and specifically targeted at smaller high-risk companies. For guidance on claims for damages for a negligent breach of duty of care outside a statutory duty, see Practice Notes:Negligencewhen does a duty of care arise?Negligencewhen is the duty of care, Multilateral Trading Facilities (MTFs)BREXIT: 11pm (GMT) on 31 December 2020 (IP completion day) marked the end of the Brexit transition/implementation period entered into following the UKs withdrawal from the EU. 2023 Vestd Ltd. Company number 09302265. When options are granted to an employee, they typically do not become available all at once. In HMRCs view, the key principles relating to the exercise of discretion are as follows: Specified events and time-based events use of discretion. This is not normally an issue where signing and completion occur simultaneously as EMI options are usually exercised immediately before completion. Instead the amount owed for the shares purchased on exercise of the options is deducted from the cash proceeds of the shares that are sold to the buyer on the sale. A good point about the legislation is that the calculation of tax market value for the purposes of the 250,000 and 3m limits only has to be performed once at the time of grant of the EMI option. Entering N/A or not applicable will result in your attachment being rejected. Summary of the Option's terms The Option will entitle you to purchase [insert maximum number and type of shares which can be exercised pursuant to the option agreement] shares in the Company at a price of [insert exercise price of shares] per share [if, broadly, there is an 'Exit' event of the Company (which is broadly a takeover of the . From that date, employees must provide a written declaration that they meet those requirements. Employees who obtain options from you, however, will be subject to a vesting schedule. For example, an employee has options over 200 shares and choses to exercise the option to acquire 100 shares. Enter the amount paid by the employee to acquire the shares. This has resulted in increased buy-in costs for employees and/or tax liabilities on exercise. However, businesses should note a number of potential pitfalls. No advance clearance or approval procedure is required, although it is advisable to obtain HMRC's agreement of the valuation you reach. It is possible to amend EMI scheme rules to permit performance conditions to be applied to future option grants without affecting existing options? Enterprise management incentives (EMI) options may be granted under a set of EMI share option scheme rules, or by way of an EMI standalone share option agreement, as long as the agreement is written and contains the information listed in paragraph 37 of Schedule 5 Part 5 to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. Be prepared to pay 10% Capital Gains Tax (CGT) at the time of sale (see below for more information). With a cliff, if an employee departs after six months, they dont obtain the right to any shares. The last time the country had to face the consequences of health staff striking was in 2016 when the junior doctors walked out over the renegotiation of their contract. It is common for EMI plans and option agreements to contain provisions which allow for various discretions to be exercised in the operation of the arrangements. Discretionary changes to the timetable for vesting of an exit only option will typically not amount to a change to the fundamental terms of the option, Discretionary changes to the timetable for vesting of time-based option is likely to be a change to the fundamental terms of the option, In respect of an option where the exercise is contingent upon the option having vested in full, a discretionary change to the timetable for vesting which does not change the date on which the last of the shares subject to the option may vest, should usually be acceptable, In respect of an option that can be exercised immediately following vesting, any change to when the option vests would not be an acceptable change. As announced in Budget 2018, Finance Bill 2019 will include provisions under which, for disposals on or after 6 April 2019, the minimum qualifying period will be two years (unless the. The Company who is giving EMI options must hold the majority of shares in any subsidiary (more than 50%). In such circumstances it is usual for the option holders to join in and exercise their options. non-voting or growth shares. The legislation sets few formal requirements on EMI schemes, the three requirements being that: 'options must be granted for commercial reasons in order to recruit or retain an employee in a company and not part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax.' (para. The firm has noticed a recent surge in the popularity of EMI options as they are a great way to drive recruitment and to incentivise existing staff. With an EMI scheme, an employee has the right to exercise their options either upon exit (typically the sale of your company to another) or . Setting up a limited liability partnership (LLP). While this may be strictly true, we would adviseallcompanies to make use of HMRCs facility for advance approval to share valuations. Enter the price at which the employee was granted the option. Dont worry we wont send you spam or share your email address with anyone. Once an EMI option is granted with an exercise price of not less than AMV, it is often assumed that the employer and employee are home and dry as far as the tax breaks are concerned. When an adjustment is made to a companys share capital, there is normally: This will affect the option granted and the exercise price of each share under option. There is no change in valuation practice with the introduction of the templates. The only company we saw with a direct integration to Companies House. Last week the Government published its response to the 2022 consultation. You enter 100 in this field. This is a valuable benefit for the company and the buyer so a seller should factor this in when negotiating price. However, there were no specific guidelines and hence it was not clear as to what would constitute acceptable or unacceptable exercise of discretion so as to determine whether or not there has been a breach of the fundamental terms of an EMI Option. This is the specific number issued by Companies House to UK registered companies. HMRC has recently updated their guidance in the HMRC manuals at ETASSUM54300 on their views about what would and would not constitute acceptable exercise of discretion in the context of EMI Options. Specified events and time-based events - use of discretion Use this worksheet to tell HMRC about taxable exercises of options in the tax year. If you are considering setting up an EMI option scheme or one of the other schemes discussed in our previous articles, or if you have any related questions then feel free to get in touch with an expert by contacting Angus Bauer, Partner at Ashfords LLP on a.bauer@ashfords.co.uk. Following IP completion day, key transitional arrangements come to an end and, Parent company guarantees (PCGs) in constructionIn the construction industry, parent company guarantees (PCGs) are commonly given to the employer by the main contractors holding company to guarantee the performance of the contract by the subsidiary main contractor. While the guidance does not cover all circumstances, it appears to us that HMRC makes a distinction between when an EMI Option can be exercised and the extent to which it may be exercised. Another consideration to make life easier when the options are exercised before a take over is to allow the options to be exercised on a cash free basis. An exit may be defined as your companys sale to another or some kind of management buy-out. This is prevalent if the company has unwittingly allowed the EMI options to become non-qualifying so the options lose their tax advantage status and incur tax and/or NICs liability. Enter the PAYE reference number of the employees employing company. Its free, takes only a few minutes, and will help you understand how to start rewarding your team with equity. If any shares were retained or at a later point the employee decides they now want to sell the shares enter no. Enter the date the option was released (including exchanges), lapsed or cancelled. Instead, they vest, allowing the recipient to slowly gain their rights to them. In addition, as outlined above, if the exercise price is set below the tax price agreed, then the employee is liable for income tax on the difference, and also NI if the shares are deemed readily convertible at the time (i.e. It is not acceptable to amend an EMI Option agreement or rules or use discretion to create a new right of exercise, introduce a discretion clause where none existed before or to change the date of exercise, unless de minimis. Dont worry we wont send you spam or share your email address with anyone. The exercise of discretion involves the decision maker using their judgement to come to a decision and, in the context of a share plan, the decision maker would usually be the board of . It's designed for employees or directors who work over 25. One of the additional benefits of EMI is their perceived simplicity and it is true to say that EMI has helped to demystify employee share schemes. With this option, your team will work hard toward the inevitable goal of an exit, so that you may all share in the same success. UMV is the value of a share or security ignoring any restrictions or risk of forfeiture. Enter no, if none applies and skip question 3. Q&As. An example of a discretion clause in specified event EMI schemes would be one which allows, subject to the discretion of the board, for the shares subject to the option to vest at an accelerated rate upon the occurrence of an exit. These milestones might be something like: It is possible to utilise performance-based vesting with some employees, and a simple cliff-based schedule with others. It is worth flagging that there are a number of steps to this online process and companies (particularly those using an agent or who are not registered for ERS online filings) would be advised to start the process as soon as possible in order to ensure that they can comply in time. Whilst this exit route is less common than a trade sale for many early stage tech companies it is normal for an option scheme to cover a listing event. In the past it was accepted that this condition would be met by stating within the EMI option agreement that the shares were subject to any restrictions set out in the companys articles of association (and usually appending that document to the EMI option agreement). They're useful because they're a good way of attracting and retaining staff, so especially important now. If the company is not UK registered or does not have this number then do not make any entry in this column. Free trial Already registered? by Steve Halkett
Enter the price at which the employee was granted the option. If this employee were to leave the organisation prior to the completion of their third year, the vesting frequency was set to yearly, they would potentially have the right to exercise the vested amount of their options. The EMI attachment only needs to be completed and then uploaded where there are outstanding qualifying options and there has been activity in the tax year. Steve is a partner in the corporate team who specialises in transactional work. You can change your cookie settings at any time. EMI options are a creature of tax law and practice and so require regular attention to make sure they deliver both economically and fiscally. Another . If the employee does not exercise their options within this 90-day period, they will . This is when the employer and the employee agree or jointly elect for the employee to meet the employers liability to pay secondary NICs on certain types of share awards and share options gains. If it is, the EMI options issuing company will not be a qualifying company for EMI purposes and this will mean that it is unable to issue EMI options. Access this content for free with a trial of LexisNexis and benefit from: To view the latest version of this document and thousands of others like it, sign-in with LexisNexis or register for a free trial. A cashless exercise is where an option holder exercises his options but does not physically pay the exercise price; it is instead deducted from the proceeds of sale of the shares. Enter the numbers only from this reference ignoring any letters. In addition, if any performance criteria was established in the agreement, such as meeting sales or revenue goals, this criteria must have been met. Biodiversity Net Gain (BNG) requirements will come into force in November 2023. Once the exit occurs, the issued options are converted into shares, and employees are able to sell them immediately. Such a change would not affect when the option may be exercised, meaning that, so long as such an exercise of the discretion was made in good faith for the purpose of ensuring the fair and/or effective operation of the option in accordance with the principle from the Burton Group case, it would be permissible. The result of this can be that options are granted in excess of the individual and/or aggregate EMI limits with a proportion of perceived EMI options being treated as tax inefficient unapproved options. Does your company qualify for EMI? As well as disgruntled employees being taxed at up to 47% (rather than at 10% or less) on a proportion of the gain on the option shares, specific indemnities, price chips and retentions could also be requested by a buyer/investor to cover potential PAYE/NIC exposures. Failure to exercise an EMI option within 90 days of the happening of such an event can cause part of the option gain to be taxed at higher income tax/NIC rates. While not an issue in terms of compliance, a common misunderstanding is that the exercise price of an EMI option must be set at not less than UMV in order for EMI options to secure their full tax efficiencies - when in fact it is the lower AMV that is relevant for these purposes. The unrestricted market value (or UMV) which ignores the negative impact on value of certain restrictions on shares, for instance, leaver provisions. Two common types of EMI Options are those that are exercised based on (i) specified events, for example, exit only options, and (ii) time elapsed, for example, time-based options. The option holder has stopped meeting the working time requirement. Where a question or column requires a YES/NO entry, the following formats are acceptable: These fields appear across different worksheets of the EMI template. Previously this formed part of the EMI1 form but companies now need a declaration to that effect. This would not normally be an occasion for an option holder to exercise their options. Under rules introduced with effect from 6 April 2013, shares acquired as a result of the exercise of an EMI option will attract entrepreneurs' relief (subject to satisfying conditions). Their investment in you is rewarded in the form of fully vested options. There are broadly two common types of EMI option schemes - those that permit exercise only upon the occurrence of a specified event, and those that permit exercise after a defined period of.