How to set up an EMI scheme
Setting up the scheme
Having consulted an expert adviser like Barnes & Scott, the company and its board of directors must establish the scheme particulars. This process would determine:
- which employees are eligible; and how future employees could become eligible
- whether any restrictions will be placed on the shares employees will be able to acquire when exercising their options (for example, restricted voting or dividend rights)
- the vesting schedule that the options would be subject to.
Most EMI schemes we work with will have a vesting schedule such as “four year vesting with a one year cliff” (meaning an option does not begin to accrue until the end of the first year after it is granted), or a right to exercise only upon an exit such as a company sale or takeover. Alternatively, vesting schedules can be based on performance – for example, hitting specified sales targets – although this can be difficult to measure.
A company’s Articles of Association should also be checked and may need to be amended to permit the creation and operation of the EMI scheme. If amendment is necessary this must be passed by the board using a special resolution with a 75% majority. The revised articles must then be filed with Companies House within 15 days of the amendments taking effect.
The underlying shares that employees can buy using options granted through the scheme must be ordinary shares of the company, fully paid up and redeemable – but they can be of a special class and be subject to restrictions or special provisions. They do not need to carry voting rights.
Before the options are granted the company must enter into a written agreement with each employee, which should include:
- the number of shares that may be acquired when the options are exercised
- the exercise price and/or the mechanism by which the price of the shares is determined
- when and how the options may be exercised
- any conditions that affect the terms of the option
- any restrictions attached to the shares
- any circumstances under which shares acquired by the employee may be forfeited
Valuation of the shares
A valuation of the shares at the time the options are granted is needed, to set the exercise price accurately. Listed shares will have a clear and available market price, but private company shares will need to be valued. A company can use its own model for valuation – assisted by an expert adviser such as Barnes & Scott – provided this can be justified to HMRC.
In these cases the company and its adviser should complete a VAL231 form and submit this to HMRC, along with any necessary supporting information comprising a valuation report, see
here.
The valuation process should clarify both the unrestricted market value of the shares (UMV) and the restricted, or actual market value (AMV). The latter may be different if limitations are placed on the shares employees will obtain when exercising their options, as those shares could in theory be less valuable to a potential buyer than ordinary shares would be. Both the UMV and the AMV should be agreed with HMRC, even if there are no restrictions placed on employee shareholders in the company’s Articles of Association.
Granting the options
All relevant legal documents and board minutes must be signed before the valuation of shares expires, within 60 days following acceptance of the valuation by HMRC. Previously the company was required to register the scheme and notify HMRC of the agreement within 92 days of options being granted, however this has now been changed to by 6 July following the end of the relevant tax year. We would however advise that all schemes are registered as soon as possible.
Following notification, HMRC then has 12 months to contact the business with any queries. The company must submit an annual online return by 6 July each year, detailing the status of the options granted via the scheme and/or any disqualifying events.
All elements of the scheme registration and annual online returns can be handled by Barnes & Scott.
