Employee share option schemes can help your company attract and retain talent in the business. In particular, the Enterprise Management Incentive scheme (EMI) scheme is a flexible share plan that can be tax efficient for your Company and your employees who participate in it.

There are a number of conditions that have to be satisfied to qualify for an EMI scheme including:

• having a permanent establishment in the UK;
• not majority owned by another entity;
• only having qualifying subsidiaries;
• having fewer than 250 full-time employees;
• having gross assets of £30m or less;
• the employee in question works at least 25 hours each week or 75% of their working time for the Company;
• the employee nor their relatives cannot have a material interest of more than 30% of the ordinary share capital of the Company before the option is granted. This prevents employees whose parents own the Company from being granted EMI options.

This is not an exhaustive list of conditions, and the EMI legislation needs to be examined fully before concluding the Company can grant qualifying options.

These conditions will have been satisfied when you established the scheme and hopefully, the scheme will have driven the growth in the business you intended. The setting of appropriate performance conditions can help drive growth. Be careful though not to breach some of the qualifying conditions whilst you are scaling up the business. Increasing the headcount or the gross assets will not affect existing EMI options; it will prevent the grant of new options.

You should also ensure the share valuation is agreed with HMRC, the signature mechanics are completed and the Company has filed the relevant returns on time with HMRC.

Unfortunately, an inadvertent breach will disqualify the scheme from the tax treatment you were seeking, and such a breach may only come to light when the business is going through a sales process. At a critical time for the business, when you are hoping to convince a third party to buy your Company, you may find you have a very despondent management team on your hands.

Our recommendation is that you have any share scheme that you have introduced to the business examined regularly to ensure that it still achieves what it was intended to achieve, long before you prepare to sell the Company.

For more information on Enterprise Management Incentive schemes, read our handy pdf guide

If you have any questions about Employee share option schemes or the Enterprise Management Incentive scheme, please contact Geldards Corporate Team