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Where Taxpayers and Advisers Meet
Back to Basics: Enterprise Management Incentives
01/08/2001, by Mark McLaughlin CTA (Fellow) ATT TEP, Tax Articles - General
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Tax Journal by Mark McLaughlin ATII TEP

A tax favoured share incentive scheme was introduced by the Government in Finance Act 2000. This article explores the scheme.The Enterprise Management Incentives (EMI) scheme is a form of tax favoured share option scheme. The legislation is principally contained in Finance Act 2000 Schedule 14. When first introduced, the Government's stated purpose of the scheme was to help 'small, higher risk' companies recruit and retain 'key' individuals to help their businesses succeed and grow, by offering tax-advantaged share options. Subsequent amendments were made in Finance Act 2001, with the intention of improving the scheme and increasing its appeal to smaller companies.

This article summarises the conditions for using the scheme, outlines the tax and NIC treatment of shares acquired under EMI options, and mentions the various changes introduced in FA 2001.

Using the scheme

One of the Government's objectives was to 'cut red tape', by making EMI schemes relatively simple to administer and operate. For example, a company is not required to obtain Inland Revenue approval before implementing the scheme. However, from 5 April 2001 an application can be made to the Revenue for advance assurance about whether the company will meet the qualifying requirements of the scheme. Unfortunately, this assurance does not extend to all of the scheme's requirements.

Scheme conditions

To take advantage of the scheme, qualifying options over the shares of a qualifying company must be offered to eligible employees by reason of their employment with that company or the group parent company, as appropriate.

The option

An option is broadly a 'qualifying option' for EMI purposes if various scheme requirements are met, if the option itself satisfies certain conditions in relation to its terms and the circumstances in which it is granted, and provided the option is properly notified to the Revenue.

Scheme requirements

The following are general requirements for scheme approval:

(a) Purpose of granting the option - an option must be granted for commercial reasons, and not for tax avoidance purposes. In addition, following FA 2001 the purpose of granting the option must be to recruit or retain an employee. Previously, the individual must have been a 'key' employee. As there was no definition of 'key' it is perhaps fortunate that this word has been removed from the legislation, to save potential disputes over differences in the employee's perceived value to the business!

(b) Employees' maximum entitlement - the maximum market value of unexercised EMI options granted by reason of an individual's employment is £100,000 per employee. Any excess is treated as non-qualifying. The shares are valued at the date of grant. Where this limit is reached, no further options granted within the next three years will qualify as EMI options.

(c) Total value of unexercised options - Finance Act 2001 introduced a requirement that the maximum value of unexercised EMI options over the company's shares must not exceed £3 million. An option does not qualify if this limit had already been exceeded when granted. If the grant of an option causes the limit to be exceeded, the excess will not qualify for the scheme's favourable tax treatment.

For shares granted before 12 May 2001, the number of employees holding qualifying share options in the company at the same time was restricted to a maximum of 15.

Option terms

The option must be granted subject to the following qualifying terms and conditions:

(a) Ordinary shares - the option must relate to fully paid up, non-redeemable ordinary share capital of the company.

(b) Exercise of option - the option must be capable of being exercised within ten years of being granted.

(c) Written agreement - the scheme option must take the form of a written agreement with the employee, stating that the option is granted under the EMI provisions. The agreement must indicate the date on which the EMI option is granted, the number of shares that may be acquired, any purchase price payable for the shares (or alternatively how the price will be determined), and the procedure for exercising the option. Any conditions affecting the employees' entitlement, such as performance criteria, risk of forfeiture or other restrictions attaching to the shares should also be detailed in the agreement;

(d) Transfer of option rights - the employee must be prohibited from transferring any rights under the options. The personal representatives of a deceased employee cannot exercise an option more than a year after his or her death.

Notifying the Revenue

For EMI options granted to employees after 11 May 2001, notice must be given to the Revenue within 92 days of being granted by the employer, supported with a copy of the option agreement. For shares granted before that date, the notice period was 30 days. The notice must contain a declaration by a company director or secretary confirming that the options satisfy scheme requirements. The employee receiving the option must also declare that certain requirements are satisfied as regards working time (see below). A specimen notice can be downloaded from the Revenue's website (

The Revenue can make an enquiry into an option notified to them within twelve months following the end of the 92 day (or 30 day) notification period, or longer if the notice is found to be false or misleading. If no enquiry notice is issued, the option can be assumed to have met the EMI scheme requirements.
Alternatively, upon completion of an enquiry, the Revenue will issue a closure notice and direct whether the scheme requirements are satisfied. An appeal procedure is available to the company in the event of a negative decision by the Revenue.

The company

The company must satisfy a number of requirements to be a 'qualifying company' under the scheme:

(a) Control - the company must not be under the control of any other company ('control' for these purposes is defined in TA 1988 s 840).

(b) Group subsidiaries - all of a company's subsidiaries must be a 'qualifying subsidiary', i.e. the company (or another of its subsidiaries) broadly controls of at least 75 per cent of the share capital, voting power, assets or distributable profits of another group member.

(c) Gross assets - the value of gross assets held by the company (or group as a whole) must not exceed £15 million, based on a balance sheet prepared on a consistent basis and in accordance with normal UK accounting practice (Statement of Practice 2/00). It is worth noting that the Government is consulting on increasing this limit to £30 million in the 2002 Budget.

(d) Trading activities - the company must exist wholly for the purposes of carrying on a qualifying trade, and either be carrying on that trade or preparing to do so. In the case of a group, its business taken as a whole must not substantially consist of non-qualifying activities.

A 'qualifying trade' is one that is wholly or mainly carried on in the UK on a commercial basis, and which does not include substantial excluded activities. Those activities mainly consist of low risk, financial or property-backed businesses, such as legal, banking, hotel or land dealing undertakings.

The employee

The individual must satisfy the following tests to be an 'eligible employee' for the purposes of receiving EMI share options:

(a) The employment - the individual must be an employee of the company or a qualifying group subsidiary.

(b) Working time - the employee must be committed to working the lower of 25 hours per week or 75 per cent of his or her working time for the company or group. For example, a part-time employee working 10 hours per week would pass this test if the individual had no other employment, as 10 hours represents 100 per cent of the employee's working time.

(c) Material interest - an individual must not have a 'material interest' in the company or a group subsidiary, i.e. he or she cannot control broadly more than 30 per cent of the company's ordinary share capital or, in the case of a close company, the right to assets available for distribution in a winding up. The interests of associates are taken into account for these purposes.

Income tax and NIC treatment

No income tax or NIC charges arise when an EMI scheme option is granted.

The option must be exercised within ten years of being granted. No income tax or NIC charges arise upon exercising the option, if the employee buys the shares for their market value when the option was granted. The employee is not taxed on any growth in value of the company's shares between the grant and exercise of the option (see Example 1).

If the employee acquires the shares for less than market value (or nil), an income tax charge arises on the difference between the market value of the shares when the option was granted (or if lower, when the option was exercised), and the exercise price (if any). For options exercised after 11 May 2001, any price paid for the grant of the option may also be deducted in arriving at the tax charge (see Example 2).

If the shares are readily convertible into cash, NIC is charged on the same discount. The employer may be required to operate PAYE, if the shares are in the form of a 'readily convertible asset' (TA 1988 s 203F(1)).


Kevin has been a full-time production manager at Widgets Ltd for several years. On 1 July 2001, he is granted EMI options over 1,000 shares in Widgets Ltd for their market value on that date of £25,000.

Kevin exercises his options on 1 December 2005, acquiring 1,000 shares for £25,000. The market value of 1,000 shares at that date has increased to £85,000. However, there is no income tax or NIC liability in respect of the increase in value.


The circumstances are in Example 1, except that Kevin is granted the EMI options at an exercise price of £5,000. He does not pay anything to purchase the options.

When Kevin exercises his options on 1 December 2005, an income tax charge arises of £20,000, being the difference between the market value of the shares when the options were granted of £25,000, and the exercise price of £5,000.

If the market value of the shares on 1 December 2005 had been £15,000 and not £85,000, the income tax charge would be £10,000, being the difference between the market value upon exercise and the price paid.

This charge is subject to PAYE and NIC if the shares are readily convertible assets.


The facts are in Example 1.

Kevin retains his shares in Widgets Ltd until 31 December 2006, when he sells them for £100,000, at a time when he is a 40 per cent taxpayer.

His CGT liability for 2006/07 is as follows-

Sale proceeds100,000
Less:Taper relief (75%)(56,250)
Net gain18,750
Less:Annual CGT exemption (say)(7,500)
Chargeable gain£11,250
CGT @ 40%£4,500

Kevin has owned the shares for one complete year. However, taper relief runs from 1 July 2001 to 31 December 2006. Full business asset taper relief is therefore claimed.

Kevin's net receipt in respect of his EMI shares is £70,500 (i.e. £100,000 proceeds less £25,000 cost and £4,500 CGT).

Withdrawal of relief

Relief under the EMI scheme can cease to apply where certain disqualifying events occur, giving rise to an income tax charge. A 'disqualifying event' includes the following:

* the company becoming a 51 per cent subsidiary or under the control of another company (except for company takeovers involving the grant of replacement options where all the relief conditions are satisfied);
* the company ceasing to carry on a qualifying trade;
* the employee no longer satisfying the employment or working time requirements (either committed or actual working time);
* variations of option terms, which increase the market value of the option shares or make the option non-qualifying;
* alterations in share capital, which cause the EMI conditions to be breached, or increase the market value of the option shares (unless, following FA 2001, the alteration was for commercial reasons, or any increase was unintentional. Prior to FA 2001, Revenue approval was required for alterations in share capital not to be a disqualifying event);
* conversions in the class of EMI option shares (except in certain limited circumstances);
* the employee being granted options under an approved share option scheme (not a SAYE scheme), which results in the employee holding unexercised options worth more than £100,000; or
* the company (or group) preparing to trade but either ceasing to do so, or not commence the trade within two years of the option being granted;

However, if the employee exercises the EMI option within 40 days of a disqualifying event, the tax and NIC benefits are not affected. Otherwise, the resulting tax charge is based on the difference between market value of the shares when the option is eventually exercised, and their market value immediately before the disqualifying event (note that, following FA 2001, any payment for the grant of the option may be also be deducted). This increases the tax charge arising in any event if the employee initially acquired the shares at a discount.

Capital gains tax

Shares acquired under the EMI scheme are subject to CGT upon their eventual disposal. The employee's gain is calculated on the sale proceeds less deductions for the cost of the shares, anything paid for the grant of the option, and amounts (if any) chargeable to income tax (see Inland Revenue Capital Gains Manual at para 56444).

However, unlike other shares, qualifying EMI shares are treated for taper relief purposes as having been acquired when the option was granted, not exercised. The taper relief 'clock' may therefore start to run some time before the EMI option is actually exercised, often a number of years before the shares are actually acquired. Maximum business asset taper relief can therefore be reached four complete years after the EMI option is granted, although the Government recently announced that the qualifying period for business asset taper relief is to be reduced to two years (See Example 3).

Practical points

Whilst a company can implement an EMI scheme without obtaining Revenue approval, it must comply with the notification procedure mentioned above. In addition, a valuation of the company's EMI shares will be required when an option is granted, and possibly on other occasions such as upon exercise if the option was granted at a discount, or when a disqualifying event occurs. An application to the Revenue for a share valuation in connection with the EMI scheme can be downloaded from its website (share schemes section), and can be submitted by the company in advance of an option being granted.

If the company's shares subject to an EMI option are quoted on a recognised stock exchange, the Revenue will accept the stock exchange value as the market value, and a valuation will not be required.

The Revenue have information powers regarding the scheme, to ensure ongoing compliance with scheme requirements. In particular, there is an annual return procedure for EMI schemes. The company must submit an annual return to the Revenue for any tax year in which its shares were the subject of a qualifying option, within three months following the end of the relevant tax year.


The EMI scheme offers a relatively straightforward, convenient and flexible means for companies to offer employees the option to acquire shares in it. The scheme also offers existing and prospective employees potentially attractive financial rewards from actively participating in the business, which are enhanced by favourable treatment in terms of income tax, NIC and capital gains tax. The EMI scheme requirements should not be unduly onerous in the majority of cases, but they nevertheless need to be monitored on an ongoing basis to ensure continued compliance.

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

Mark  is a consultant with The TACS Partnership LLP ( He is also editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional) 

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’. This content is available as part of a number of Bloomsbury Professional's online modules.

He is Editor and co-author of ‘HMRC Investigations Handbook‘ (Bloomsbury Professional).

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’, which provides free information and resources on UK taxes to taxpayers and professionals, and TaxationWeb’s sister site TaxBookShop.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb ( in 2002.

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