How to set up an EMI options scheme

Last updated: 21 June 2024. 

If you are considering creating an Enterprise Management Incentive scheme (EMI), you may be concerned that this process of rewarding your team will:

1. Take up a lot of your time,
2. Involve complex paperwork,
3. Lead to difficult back-and-forth discussions with HMRC.

And with an estimated 50% of new EMI schemes being found non-compliant at the time of exit, you may be worrying about further costs and headaches that only emerge after the scheme is established.

But don't let this put you off; there is a solution.

At Vestd, we’ve built a tool that helps hundreds of UK businesses efficiently manage their share option schemes including EMI.

So we know from experience that if your business has the proper resources, support, and guidance, you can set up a scheme that’s compliant from the very start, and reward your team with the shares they deserve for a job well done.

This 10-minute guide will teach you the six steps to setting up an EMI options scheme.

While there’s plenty to take in and no shortcuts to success, we’ll show how you can get help with the process - and avoid any potential pitfalls that may arise along the way.

The six steps to creating an EMI scheme

Here is the process we share with businesses:

1. Establish your eligibility
2. Create the scheme
3. File for valuation with HMRC
4. Authorise your option pool and receive approval internally
5. Grant EMI options to employees
6. Notify HMRC during your next annual return

This diagram shows the steps you’ll take to ensure your organisation’s EMI scheme is created properly and is eligible to qualify as an EMI with HMRC:

Let’s go through these steps in more detail so you understand what you need to do at each stage, and who to contact for help if you get stuck or have questions about compliance.

1. Establish your eligibility for an EMI share scheme

Before you do anything else, you’ll need to ensure you and your team are actually eligible for an EMI scheme.

Take our EMI eligibility quiz today to find out.

Doing this first guarantees that there aren’t any surprises when you file with HMRC. You don’t want to find that you don’t qualify at the final step after doing so much work to prepare!

First, you’ll need to meet eligibility requirements for the scheme itself. HMRC lists the main requirements as follows:

• The purpose must be to retain or recruit employees and not to avoid tax.
• You may only grant an employee a maximum value of £250,000 in options.
• The most that a company can grant is £3m in unexercised options at any one time.

Secondly, there are requirements that your business must meet to qualify for EMI:

• Your company must be independent. More than 50% of the ordinary share capital must not be owned or controlled by another company, either now or in the future.
• If your company has any subsidiary companies, they must also qualify for EMI.
• Your gross assets must not exceed £30m at time of EMI options being granted.
• You must have fewer than 250 full-time employees.
• Your business must have a permanent establishment in the UK.
• Your business may not participate in one of the disqualifying industries, including financial activities, property development, farming, or shipbuilding. 

Third, there are eligibility requirements for employees to participate in the EMI scheme:

• Employees (or directors) must work at least 25 hours each week or devote 75% of their total weekly working time to the company.
• Employees must not have a beneficial or controlling interest, directly or indirectly, of more than 30% in the company, either now or in the future.

If you aren’t certain about whether or not you meet these criteria or will meet them in the future pending possible changes to your business, a partner like Vestd can help you answer these questions and suggest changes to avoid non-compliance with the scheme.

If your proposed scheme, organisation, and employees meet these criteria, you are ready to proceed to the next step.

2. Create the EMI scheme

If you meet the eligibility requirements, your next step is to actually create the EMI scheme. This usually involves making decisions on the finer details, including if it will be exercisable or exit-based and what the vesting schedules will look like for each individual receiving EMI options.

Creating the scheme at this stage will prepare you for the next steps in the process, including filing for valuation and receiving approval from your board and shareholders. It will also help you better prepare to answer questions from your team.

You will eventually register with HMRC, but not yet: there are a few other crucial steps to take first.

3. File for valuation with HMRC

At this stage, you will need to file with HMRC to receive a valuation of your business. This process typically takes between two and four weeks from start to finish.

Filing for and receiving a company valuation from HMRC has two major benefits:

• Recipients of EMI options are confident of their value at the time of exercise because they are backed by a written valuation by HMRC.
• Filing for valuation provides some certainty regarding tax treatment going forward for both the business and employees, as long as all due criteria and processes are followed.

To proceed, you should first have a valuation report carried out for your company. You can either do this yourself with the help of an accountant or if you are working with us here at Vestd, we will do it for you.

Once you have the report, submit it to HMRC via email or post along with a completed VAL231 form. Vestd customers can do this via the platform.

This valuation is valid for 90 days from the time HMRC approves it, which will happen via letter. Once you have received it, you are ready to move on to the next step.

4. Authorise your share pool, and receive approval from your board or shareholders

With your valuation in hand, you should now create the share pool from which you will issue EMI options to your team.

Deciding on the size of this pool and the number of options to issue to your employees can be difficult. The average among our customers is 16.7%.

We have written a guide with plenty of advice on this subject, and you can also reach out to the Vestd team to get our insight on what is best to do in your particular case.

If you have an advisory board, external investors, or any other existing shareholders, you must also seek their approval at this stage before making any option grants to employees.

Most companies require formal approval both from their board and shareholders to set up and execute an options scheme. Your board and existing shareholders will likely want to review and approve the following items:

• Number of shares granted to each employee
• Whether the options are exercisable or exit-only
• The vesting schedule(s) involved
• Special conditions (if any)

Once the board is satisfied and approves your decisions, you can proceed to grant EMI options to your team members. You’re almost finished!

5. Grant EMI options to your employees

At this stage, you may now grant EMI options to your team members. Upon doing so, you should also be certain to explain the scheme and its meaning to them.

Your employees will likely want to know why you have chosen an EMI share scheme, and how it will benefit them.

They may also have some questions about the tax implications of their options, or how to exercise them in the future.

We have written a guide to engaging with your team about a share scheme that you may find useful at this step, as well as in the future.

6. Notify HMRC

You’ve reached the final step - congratulations! 

Now, before 6 April 2024, there was a 92-day window to notify HMRC of any EMI option grant. But in a bid to reduce the administrative burden on business owners, HMRC decided that's no longer necessary.

Instead, all you have to do is inform ERS of each registered EMI scheme during your next annual return (due early July of the following year). Usually, on or before the 5th or 6th of July (but not always).

Failing to do so could undermine all the effort you've put in up to this point, and put the tax benefits at risk. 

How to manage an EMI option scheme

Now that you know the six steps you should take to create a compliant EMI share scheme, you are almost ready to get started.

But setting up the scheme isn’t everything.

You also need a good tool to help you manage it. There’s ongoing administration to consider: notifications to HMRC, maintaining vesting schedules, adding and removing option holders, and so on.

You’ll need advice on how to stay compliant if the size or shape of your company changes and help to keep accurate records of what’s been issued and left in your employee option pool.

This is what we offer here at Vestd. With a simple monthly subscription, we’re able to help you efficiently and accurately manage an EMI scheme over its lifetime, ensuring compliance at every step of your journey.

Our team has set up and optimised hundreds of EMI schemes for UK businesses just like yours - businesses that want to easily reward their team with options, not burden them with headaches and tax forms.

Book a free demo with us now to learn how Vestd can help you create and manage a stress-free, fully compliant and cost-effective EMI scheme.

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