EMI Scheme For Startups: Everything You Need To Know

EMI (Enterprise Management Incentive) schemes are special plans that let startups give shares to their workers without making them pay upfront. Think of it as a way for employees to later buy shares at much lower prices.

Startups need to keep things small, work mostly in the UK, and not be owned by another bigger company to use EMI. They also can’t offer more than £3 million in shares this way.

One of the big wins of using EMI is saving on taxes – both for your startup and your team members because these schemes are taxed differently than usual.

This guide will explore everything you need to know about starting an EMI scheme in the UK.

Definition and overview of EMI schemes

EMI schemes are a way for startups to give their team shares in the company; sort of like a special deal that lets employees own a piece of the startup they work hard for.

The government sets it up to make the process fair and appealing for both you and your employees.

Your employees get the chance to buy these shares later on, usually at a price decided now – which could end up being much less than what those shares are worth in the future.

This setup is quite popular because it’s flexible and packed with benefits for everyone involved. For starters, offering shares through an EMI scheme can help you keep your best people around since they’ll have more reasons to stay put and see the company grow.

Also, EMI schemes come with some nice tax incentives which make them even more attractive.

Eligibility criteria for EMI schemes

After learning about the benefits EMI schemes offer startups, you might wonder if your startup can apply. Here’s a clear path to understanding the eligibility criteria for EMI schemes:

1. Your startup must be independent, not owned by another company.
2. It should have gross assets of £30 million or less.
3. Employ fewer than 250 people at the time you grant EMI options.
4. Conduct a qualifying trade, primarily in the UK – meaning most of your work must be within allowed activities.
5. You plan to grant these share options with the purpose of retaining or attracting employees.
6. The participant receiving EMI options must be an employee who works at least 25 hours per week or, if less, 75% of their working time for your startup.
7. Your startup can’t allocate more than £3 million in share options at any time under this scheme.
8. Each employee can hold up to £250,000 in share options granted over a 3-year period.
9. The shares involved must be ordinary shares, fully paid up and not carrying any special rights.

You can always find out more about these criteria by reading a detailed guide to EMIs.

How to implement an EMI scheme

Setting up an EMI scheme sounds complex. However, with a clear plan, you can get it up and running smoothly. Here’s how you can do it:

1. Check if your startup qualifies. Your business must have assets of £30 million or less and not be in certain restricted sectors.
2. Decide on the option terms. Think about aspects like which employees will be eligible and how long before they can buy shares.
3. Set the exercise price. This is how much employees pay for their shares, often set at market value.
4. Apply for HMRC approval. You need to get the green light from His Majesty’s Revenue and Customs (HMRC) to make sure your scheme meets all legal requirements.
5. Create the EMI option agreements. These documents spell out the details between your company and the employees getting options.
6. Grant options to your employees. After everything is approved, you can officially give options to your team members.
7. Keep records and report to HMRC. Every time someone exercises their options, you’ll need to report it using specific forms by a certain deadline each year.

Following these steps ensures that your EMI scheme remains compliant with legal requirements, benefiting both your startup’s future and its employees in the long run.

Managing and maintaining an EMI scheme

Managing an EMI scheme means paying attention to key dates. These deadlines are crucial for your startup’s compliance and ensuring the scheme runs seamlessly. We’ve listed the deadlines you need to watch out for when keeping an EMI scheme:

1. Initial HMRC notification must be within 92 days after granting any options. If you miss this deadline, the tax advantages for those options could be lost.
2. Annual return filing by July 6th of every year is non-negotiable. Failing to file or filing incorrectly can lead to penalties.
3. Keep a close eye on the three-year anniversary of each option grant. Employees need to exercise their options within ten years, but exercising after three years offers the most favorable tax treatment.
4. Update HMRC if there are significant changes in your company’s structure or eligibility. Important changes might include a company buyout, sale, or significant shifts in business focus that could affect EMI eligibility.
5. Watch out for the 40-day deadline following an employee leaving the company. Ex-employees have this window to exercise their options.
6. Ten-year expiration from the date of the grant is critical; options can’t be exercised beyond this point.
7. Review company valuation regularly; at least once a year or after major events that might affect it – like new funding rounds or significant sales achievements.

By staying ahead of these deadlines and requirements, you ensure your EMI scheme remains compliant and beneficial for all involved.

Setting your startup for success with an EMI scheme

It’s clear how valuable this setup can be for your startup. These schemes bring together tax relief and equity incentives in a powerful way.

They make startups more attractive to skilled workers by offering something special – a piece of the company’s potential growth.

With the right approach – from meeting HMRC requirements to effectively communicating with your team and using software cleverly – you’re setting up a foundation for shared success.