How to set up an EMI scheme

📘 Overview

This guide explains the key steps to setting up an Enterprise Management Incentive (EMI) scheme, from designing eligibility rules and obtaining share valuations to registering and maintaining compliance with HMRC.

Overview

An EMI scheme allows growing companies to reward and retain key employees through share options that offer potential tax advantages. Setting up a compliant scheme requires careful planning, legal documentation, and HMRC approval.

This article covers:

• How to establish the scheme framework
• Share valuation and HMRC agreement
• Granting and registering options
• Ongoing reporting obligations

📊 Setting Up the Scheme

Once you’ve consulted an expert adviser such as Barnes & Scott, your company’s board of directors must formally establish the scheme particulars.

This process involves determining:

• Eligibility criteria: which employees qualify and how future employees may become eligible
• Share restrictions: whether any limitations (for example, restricted voting or dividend rights) will apply
• Vesting schedule: how and when options become exercisable

Example: Typical Vesting Schedules

Most EMI schemes we help implement use a structure such as “four-year vesting with a one-year cliff.” This means no options accrue until the end of the first year, after which they vest monthly or quarterly over the next three years.

Other schemes may tie vesting to performance milestones (for example, achieving specified revenue targets), although these can be harder to measure consistently.

Updating Company Articles

Your Articles of Association should permit the creation and operation of an EMI scheme. If they don’t, they must be amended by special resolution, requiring a 75% majority of shareholder approval.

Once passed:

✅ File the amended Articles with Companies House within 15 days of the change taking effect.

Type of Shares (updated for accuracy)

Options granted under an EMI scheme must relate to ordinary shares that are:

• Fully paid up, and
• Not redeemable.

These shares may be of a special class and be subject to restrictions or special provisions, and they do not need to carry voting rights.

Employee Option Agreements

Before granting options, each participating employee must enter into a written option agreement setting out:

✅ The number of shares covered by the option

✅ The exercise price (or the mechanism for determining it)

✅ When and how the options can be exercised

✅ Any conditions or performance criteria

✅ Any restrictions on the shares acquired

✅ The circumstances of forfeiture (for example, leaving the company before vesting)

💡 Valuing the Shares (minor clarifications)

To ensure fairness and tax compliance, a share valuation is required at the time the options are granted.

• For listed companies, the market price is readily available.
• For private companies, the shares must be valued using a reasonable method, often prepared by the company with support from advisers such as Barnes & Scott and submitted to HMRC Shares and Assets Valuation (SAV).

🔗 HMRC guidance on getting a share scheme valuation (includes VAL231)

[Get a share scheme valuation from HMRC]

The valuation should establish:

• Unrestricted Market Value (UMV) the open market value of the shares, and
• Actual Market Value (AMV) the value after taking account of any restrictions.

You propose these values to HMRC when seeking agreement for EMI.

How long the valuation is valid (corrected)

Once HMRC agrees the EMI valuation, it is valid for 90 days from the agreement date (not 60 days). Ensure the option grant and board approvals are completed before that validity period expires.

✅ Granting the Options (deadline updated and clarified)

• Grant within the valuation validity window: complete board minutes and grant documentation within 90 days of HMRC’s agreed valuation.
• Notify HMRC of the grant:
  • For options granted on or after 6 April 2024, notify by 6 July following the end of the tax year in which the options were granted.
  • For options granted before 6 April 2024, the historic 92-day notification rule still applies.
• Annual return: file the annual online EMI return by 6 July each year, confirming option status and any disqualifying events.

📘 Barnes & Scott can handle scheme registration and annual returns on your behalf.

Key Practical Points

• Review and, if necessary, amend your Articles of Association before establishing the scheme.
• Obtain and agree an EMI valuation with HMRC (UMV/AMV as applicable), then grant within 90 days.
• Notify EMI grants to HMRC by 6 July after the relevant tax year for grants on or after 6 April 2024, or within 92 days for earlier grants.
• Submit annual EMI returns by 6 July each year.
• Keep clear records of all resolutions, valuations, and agreements.

Summary

EMI is a powerful retention tool, but timing matters: ensure grants happen within the 90-day valuation window and that HMRC notifications and annual returns are completed by 6 July where applicable. Confirm that the option shares are ordinary, fully paid up, and not redeemable, and document vesting, restrictions, and forfeiture clearly.