The Importance of Registering EMI Options

Companies are constantly seeking innovative ways to attract and retain top talent, and one such method is through the use of Employee Management Incentives (EMI) options.

EMI options can be a powerful tool that provides tax-efficient share options to key employees. However, the benefits of EMI options can only be fully realised if they are properly registered with HMRC (HM Revenue and Customs), which can easily be missed if proper administration is not maintained during the set up process.

What are EMI Options?

EMI options are a type of share option scheme specifically designed for small to medium-sized enterprises (SMEs) in England and Wales. Introduced in 2000, EMI option schemes allow companies to grant share options to employees, giving them the right to purchase company shares at a predetermined price in the future.

The key advantage of EMI options is their tax efficiency; when properly structured and registered, employees benefit from reduced Income Tax and National Insurance contributions, while the company enjoys Corporation Tax relief on the difference between the market value of the shares and the price paid by the employee.

What is the registration process?

For a company to benefit from these advantages, it is crucial to register the EMI options with HMRC within 92 days of the grant date if the EMI option was granted before 6 April 2024, and on or before 6 July following the end of the tax year of the grant date if the EMI option was granted on or after 6 April 2024.

The registration process involves notifying HMRC of the option grant and providing detailed information about the scheme and its participants. This step ensures that the EMI scheme complies with the requirements set out by HMRC and qualifies for the associated tax benefits.

Why does registration matter?

1. Tax Efficiency:

The primary reason for registering EMI options is to secure the tax advantages they offer. Without proper registration, the tax benefits are forfeited, and both the company and its employees could face significant tax liabilities.

This may significantly change the employees’ perspective of the EMI options when considering their value. It may also make it difficult to sell or obtain investment in the Company if there is uncertainty as to the tax that will be incurred.

For example, employees might have to pay Income Tax and National Insurance at the full rate on the difference between the market value of the shares and the exercise price, rather than benefiting from the more favourable Capital Gains Tax treatment.

2. Attracting and Retaining Talent:

Offering EMI options can be a decisive factor in attracting and retaining top talent. Employees value EMI schemes because they provide a tangible financial incentive linked directly to the company’s success.

Proper registration assures employees that the scheme is legitimate and that they will receive the expected tax benefits when they exercise their options.

3. Avoiding Legal and Financial Consequences:

Failing to register EMI options can have serious legal and financial repercussions. HMRC may disqualify the options from the EMI scheme, leading to increased tax liabilities for both the company and the employees. Additionally, the company may lose its eligibility for Corporation Tax relief, further increasing its financial burden.

In some cases, failure to comply with HMRC requirements can result in penalties and fines.

4. Simplifying Future Transactions:

Proper registration and documentation of EMI options simplify future business transactions, such as mergers, acquisitions, or initial public offerings. Potential buyers or investors will conduct thorough due diligence, and having a well-documented and registered EMI scheme can streamline the process, making the company more attractive to potential suitors.

It may be possible to submit a claim to HMRC for retrospective registration, but our experience is that this can be a costly and time consuming exercise which has low rates of success.

HMRC are generally only willing to accept an application for retrospective registration where there is a genuine reason, and not where there has been a simple lack of good practice by the company in respect of its governance and compliance.

Summary

Registering EMI options in England is not just a bureaucratic formality but a critical step in maximising the benefits of an EMI scheme. It ensures that companies and their employees can take full advantage of the tax efficiencies designed to incentivise employee ownership. Furthermore, it helps attract and retain top talent, avoids legal and financial pitfalls, and promotes good corporate governance.

Companies that overlook the importance of this registration risk significant financial consequences and missed opportunities for growth. Therefore, any company considering the implementation of an EMI scheme should prioritise the timely and accurate registration of these options with HMRC to fully realise the advantages that EMI options can offer.

For further information on EMI schemes, please contact a member of our Corporate team or complete an enquiry form down below.