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EMI eligibility

Having enjoyed (I hope) our detour from my consideration of share schemes

to look at the Child Trust Fund and Saving Gateway, I would now like to

return to the Enterprise Management Incentives scheme, the latest

Government tax-incentivised scheme to encourage wider share ownership.

In previous articles, I have looked at, among other things, the nature and

extent of the tax relief available, the types of company the shares in

which can qualify for the EMI scheme and the trading activities that will

qualify. As for venture capital trusts, what trading activities qualify

are, in effect, defined by the list of trades that are excluded activities.

The next key issue to consider is that concerning which employees are

eligible to participate in an EMI. An individual is an eligible employee in

relation to a relevant company if he or she meets three requirements.

The first requirement is with regard to employment. An employee is an

eligible employee in relation to a relevant company if he or she is an

employee of the company or a qualifying subsidiary.

The second is in connection with working time. The employee must work at

least 25 hours a week for the company or, if less, devote 75 per cent of

his working time to the company.

Third, the employee or his associates must not have the beneficial

ownership of or the ability to control, directly or indirectly, more than

30 per cent of the ordinary share capital of the company (whether close or


This last test means that substantial shareholders, which would cover most

“owner-managers”, cannot benefit from the EMI scheme. The “indirectly” part

of the condition rules out splitting shares around the close family to

avoid exclusion from the EMI.

The tax incentives are substantially focused on income tax. The value of

income tax incentives in relation to share schemes is proven and is

particularly valuable, given the potential for income tax liabilities on

share schemes that are not approved.

So what is the nature of the income tax incentives?

There will be no income tax charge in respect of any grant, or on exercise

of share options under the EMI in the period of ten years from the date of

grant of the option.

Where options are granted at less than market value at the date of the

grant there will be an income tax charge on exercise based on the amount by

which the market value at grant exceeds the amount paid for the shares,

that is, the discount is taxed.

A qualifying option will cease to qualify on the happening of a

disqualifying event. Disqualifying events include the following:

The company becoming a 51 per cent subsidiary (subject to relief in

certain cases for a qualifying share exchange).

Ceasing to meet the trading activities test.

The employee ceasing to be an eligible employee.

Variations made to the terms of the option which increase the market value

of the shares.

The grant of options which throw the employee over the £100,000 limit

(including unexercised options under company share option plans).

There are, as for any tax incentive scheme, some administrative provisions.

The Inland Revenue may require any person to provide them with such

information as they think necessary to decide whether an option is a

qualifying option. A company which has any outstanding qualifying options

in a tax year must deliver a return to the Inland Revenue. In the event of

a disagreement about market value, the employer company may appeal to the

Commissioners of Inland Revenue.

In my column next week I will continue this look at EMI by taking an

example of how the tax situation could work.


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