An EMI scheme is one of the key incentive schemes for businesses aiming to foster growth and motivate their workforce. They offer a strategic approach to incentivising employees through share ownership. They not only help attract and retain top talent but also align the employees' interests with the company's success. By giving employees a stake in the company's growth, EMI schemes are a win-win, driving innovation, boosting productivity, and propelling the organisation toward its goals.
The tax advantages of EMI schemes are also significant. As long as the option exercise price matches or exceeds the market value of the shares at the time of option grant:
- in most circumstances employees enjoy financial benefits with no income tax or national insurance contributions being charged on grant and exercise of their market value options unlike other non-tax advantaged incentive schemes;
- when an employee sells the EMI option shares they'll owe capital gains tax only on the option gains (the difference between sale price and exercise price); and
- a company can often claim a deduction against corporation tax for the amount of an employee’s option gains.
Recent changes to the compliance regime of an EMI scheme mean that there has never been a better time to set one up and help your company grow and your employees benefit from the rewards.
The recent changes are aimed at making it easier for companies to navigate compliance requirements. These changes, some of which took effect in April 2023, are expected to reduce the burden on companies and streamline processes with HMRC.
Two elements of the compliance process are subject to change:
1. Notifying HMRC of the grant of the options within 92 days, and
2. Confirmation that the option holder meets the working time requirement.
Streamlining option agreement details
Starting from April 2023, companies will no longer need to provide detailed information about share restrictions within option agreements. This means that the complex task of outlining these restrictions will no longer be mandatory. Furthermore, the requirement for companies to declare that an employee has signed a working time declaration (“WTD”) will also be removed. This move is intended to simplify the compliance process for companies. However, the working time requirement still applies.
Extension of notification period
From April 2024, companies will have more time to notify HMRC about the grant of an EMI option. The current 92-day period for notification will be extended, allowing companies to notify HMRC until 6 July in the following tax year. This extension aims to provide companies with a more feasible timeline for compliance, and aligns with the timeline for submitting the annual Employment Related Securities return.
Reasons for the changes
These changes have a dual purpose: easing the compliance burden on companies and reducing the workload for HMRC. It is often observed that the lack of share restriction details, absence of a WTD, and failure to promptly notify HMRC within the existing timeframe are the main reasons why EMI options have failed to qualify as valid options which are tax advantaged. These issues frequently lead companies to make enquiries and requests for clarification from HMRC and their removal will ease the burden on the HMRC.
Shift in HMRC's approach
HMRC's stance on notification of share restriction details and the WTD has become more lenient over time. This change in policy reflects the acknowledgment that companies might struggle with these requirements and that HMRC has not always been consistent in responding to queries in relation to these aspects, prompting the need for a more manageable approach.
Implications for companies
The removal of these requirements is expected to significantly reduce the compliance burden on companies granting EMI options. While not mandatory, it could still be considered good practice for companies to provide option holders with a copy of the company's articles at the grant date.
Welcoming changes for companies
The adjustment in the notification period for granting options is likely to be welcomed by companies. Historically, this notification period has posed challenges for companies to provide sufficient evidence of compliance, especially during due diligence processes. Aligning this notification timeline with annual employment related securities reporting obligations could enhance overall compliance.
Taking a proactive approach
Although the new timeline allows companies more time for notification, we advise a proactive stance. We recommend registering EMI share schemes and notifying HMRC of granted options as soon as possible after the grant date. This approach ensures compliance and minimises the risk of missing notifications altogether.
Enhancing compliance and reducing pressure
These changes are anticipated to bring practical shifts in compliance requirements for companies dealing with employee share options. By streamlining processes and extending timelines, these changes make compliance more manageable for companies while also alleviating some of the pressures on HMRC.
The Tax and Share Schemes experts at DWF have extensive experience in helping companies of all sizes set up an EMI scheme that is right for them.
If you would like to discuss how we can assist you or your business in setting up an EMI scheme, please contact James Cashman, Caroline Colliston, Tom Rank or any member of our Tax team.