ALL YOU NEED TO KNOW ABOUT GRANTING OPTIONS
In the UK
Enterprise Management Incentive Options (EMI) Schemes
EMI options are granted as part of a plan to incentivise employees where the options are granted for commercial reasons in order to recruit and retain employees in a company.
There are certain terms required to be satisfied in order for there to be a valid grant of an EMI option.
A qualifying company must:
- be independent;
- have qualifying subsidiaries, if it has subsidiaries;
- satisfy a gross assets test;
- satisfy tests as to its trading activities;
- satisfy the test as to having a UK permanent establishment; and
- satisfy the test regarding 250 employees.
An EMI option cannot be granted over shares in a company which is either a 51% subsidiary or under the control of another company (or of another company and any other person connected with that other company) without being a 51% subsidiary. There must be no arrangements in place by virtue of which the company could become a 51% subsidiary or come under the control of another company.
If the company has subsidiaries, then every subsidiary must be a “qualifying subsidiary”.
In order to satisfy this test, the consolidated value of the group assets (i.e. without deduction of any liabilities) must not exceed £30m.
A single company must exist wholly for the purpose of carrying on and carry on one or more qualifying trades. In general, a “tech company” will fulfil the trading arrangements requirement, even if it is not yet trading, but is preparing to trade.
UK permanent establishment
A company must have a UK permanent establishment. This requirement is met if:
- the company has a permanent establishment in the United Kingdom; or
- the company is a parent company and any other member of the group exists: (i) wholly for the purpose of carrying on one or more qualifying trade and is carrying on a qualifying trade or preparing to do so; and (ii) has a permanent establishment in the United Kingdom.
Less than 250 employees
A company will also only qualify if the number of employees in the company and its subsidiaries is less than 250. There are certain rules about calculating this number where there are part-time employees.
An individual will be an eligible employee with respect to the qualifying company if the following requirements are satisfied:
- commitment of “working time”; and
- no material interest.
Terms and Circumstances under which the Option is Granted
The shares under option must be:
- part of the ordinary share capital of the qualifying company;
- fully paid up; and
- not redeemable.
The option must be capable of being exercised within 10 years. The terms (as specified in the legislation) of the option must be set out in writing at the time of grant of the option and the option must not be assignable.
Notice of Option to be given to HMRC
For an option to be a qualifying EMI option, notice of the option must be given to HMRC within 92 days from the grant of the option.
The notice must:
- be given by the employer company;
- and be in a form required or authorised by HMRC. The notice must contain, or be supported by, such information as HMRC may require for the purposes of determining whether the requirements are satisfied.
The notice must also contain a declaration by a director or the company secretary of the employer company that: in his opinion the requirements are satisfied in relation to the option; and that the information provided is to the best of his knowledge correct and complete.
The notice must also contain a declaration by the individual to whom the option was granted that he meets the requirements in relation to the option.
Steps in setting up an Enterprise Management Incentive (EMI) Scheme
The first stage in setting up the scheme is to prepare a valuation of the company and in turn the shares upon which options will be granted. We will set the value of the option as low as justifiably possible on the basis that they represent such a small amount of the overall share capital. Once this is done we will agree this valuation with HMRC.
The options should have conditions attached to them which may be based upon the employee and/or the company achieving certain targets. The most important of these is continuous employment (if an employee leaves then their options should lapse).
There should also be a minimum period set before the options can be exercised.
The Tax Treatment for Employees
The grant of an option has no tax effect on the employee.
Upon the exercise of an option there is also no tax charge as long as the value paid is the value agreed with HMRC as at the grant of the option. If the amount paid is less than the agreed valuation there will be an income tax charge on the difference.
On the sale of shares there will be a capital gains tax charge on the difference between the disposal proceeds and the price paid for the option. If at least one year has elapsed between the issue of the option and the disposal of the shares entrepreneurs’ relief at 10% may apply and any gain can be set against an individual’s CGT (capital gains tax) allowance of £11,100.