The enterprise management incentive (EMI) plan is the most commonly adopted tax-favoured share plan in the UK and provides significant benefits to employees and employers.
However, all good things can come to an end on a business exit when the EMI plan doesn’t stand up to buyer due diligence. Mistakes are often discovered which can delay the transaction particularly if the parties want to agree the solution with HMRC pre-transaction, and also require various remedial work and cost to fix, if errors can be fixed, or otherwise the tax benefits are lost.
Undertaking an EMI health check as part of an exit readiness plan, ideally in the 18 – 24 month period before an exit can preserve the tax benefits of the EMI plan for participants and the company on a corporate exit.
Contents:
What are the common EMI option mistakes uncovered on a business exit?
1) Failure to notify the grant of the EMI options
EMI options must be notified to HMRC within a specified period following grant in order to qualify for tax benefits. Currently this period is 92 days following the grant of the option.
This timeframe is changing with effect from 6 April 2024 to align with the annual employee share schemes reporting cycle to HMRC and to require options to be reported by 6th July following the tax year in which they are granted.
If the grant notification deadline is missed, this is an automatic red flag on a transaction. There are ways to resolve this issue, but these are more likely to be successful where the failure is identified early and pre-transaction.
2) Failure to grant EMI options within the specified valuation window
HMRC provide a service to agree the valuation of shares subject to an EMI option and their agreement is effective for 90 days. If this deadline is missed, this creates uncertainty as to the validity of the valuation. Various approaches can be put in place to deal with this issue and again early discovery can help to mitigate the implications both for the employee and the employer.
3) The EMI option has been extended or lapsed
We come across circumstances where the exercise period of an EMI option has been extended or an EMI option has effectively lapsed and been re-granted. Considerable care is needed regarding these types of operation of an EMI option as the tax consequences of these actions are often unforeseen and detrimental. We can help correct these issues and it is more straightforward to do so where they are detected early.
4) Disqualifying events
There are numerous guardrails applicable to the EMI plan due to its generous tax benefits and it’s easy to inadvertently breach the rules. Early signposting of disqualifying events can help to mitigate their implications. For example, if the plan rules allow the option to be exercised before the EMI option tax benefits are switched off following the disqualifying event grace period, the tax benefits may be preserved.
5) Granting EMI options to non-UK taxpayers
It is key to remember that the EMI scheme is a scheme for the benefit of UK employees carrying out their duties in the UK. If the employee goes on secondment or moves to work in a different country during the vesting period, it is very unlikely the tax benefits will be fully preserved and the foreign tax and social security implications will need to be considered and costed into the plan. For US taxpayers working in the UK or UK employees moving into the US tax net, the implications can be even more draconian. These issues can be navigated but the earlier they are discovered the better as there will be more choices available to the sponsoring company.
How do I undertake an EMI option health check?
Our team has significant experience of implementing and diligencing EMI options and we can help you with an EMI health check to make sure your plan will stand up on a corporate event and there are no surprises and unforeseen costs, or transfers of risk for any of the parties. Contact us on 0800 689 1800 or fill out our short enquiry form below and a member of our team will be in contact.
In the meantime, you can read more frequently asked questions about setting up an EMI scheme, from the qualifying criteria to the registration process, and how it could benefit you in our article: FAQs: setting up an EMI scheme.
