In this video, Ian covers the top 10 mistakes companies make when implementing and administering an EMI scheme. After all, missing a filing or completing documentation incorrectly can nullify all of the benefits that you sought to implement. Have a listen to this video to ensure you’re covered.

So this is a list of EMI mistakes that we’ve seen in practice.

First up, the option holder not signing working time declaration, it is a key requirement of the EMI legislation that the option holder has to sign a declaration stating that they comply with the working time requirements. Either that they work 25 hours a week for the company on average or 75% of their working time. That declaration is often included as part of the option agreement, but note it can’t be backdated, it needs to be signed at the same time as you sign the option agreement.

Number two, failure to execute the option agreement as a deed or for consideration. Consideration means perhaps the sum of a pound, which is acknowledged to be paid. And these are both because you need the option agreement, to give the option holder a right to aquire the shares. The simplest way of doing that is to execute the option agreement as a deed. That basically that means signing it in front of a witness, who must be over the age of 18 and not a member of your family.

The company overview shares the EMI options are granted must be independent to other companies. So what does that mean? The company can’t be a 51% or more subsidiary of another company but that test also excludes companies which are under the control of another company more generally.

They’re a quite complex test, which can be an issue if the founder is connected to a corporate shareholder and there must be no arrangements in existence by which the company would seize to be independent. This creates an issue if people were wanting to grant EMI options if they’re coming up to a take over.

The company, over who shares the EMI options are granted, must only have subsidiaries, which are qualifying substituents. Any subsidiary the company controls must be a 51% subsidiary, and no other person may have control of the subsidiary, and nor can there be any arrangements in place for another person to take control of the subsidiary.

Another problem we see is that there is no agreed valuation of the shares. If the value of the shares isn’t agreed with HMRC prior to granting the options, the amount of tax, which may arise on the exercise of the options, if any, can’t be calculated with certainty. And I’ve seen that be a real issue on an exit.

Another issue we see is that the valuation has been agreed with HMRC but they’ve knocked the options of not being granted before the valuation expires. When HMRC agree with your value, the valuation of the shares, that valuation will be valid for 90, or during COVID, 120 days. That will be set out in the letter you receive back from HMRC. The company should grant any options which rely on its valuation, during the period for which the valuation is valid.

One issue we often see is that failure to notify HMRC of the grant of the EMI options. It’s absolutely crucial that the company notifies HMRC once an option has been granted, within 92 days of the date it’s granted. Forgetting to notify HMRC within this period will likely mean that the option granted is not a valid EMI option. If this has happened, it may be possible to apply for a reasonable excuse code, but this is quite a high bar.

Another mistake we see is changing the terms of an EMI option. If you change those terms, especially, if this is a fundamental change, this may be treated by HMRC as the grant of a new option. That’s got the potential for negative tax consequences, for both the company and the option holder.

We’ve also seen situations in which the company hasn’t kept track of its compliance with the EMI limits. Accidentally exceeding the EMI limits, will mean that the options granted in excess of the limits, which are calculated by reference to the unrestricted market value of the shares, will not qualify for EMI treatment. The company needs to keep track of these limits.

And also bear in mind that if CSOP options are also granted, they must be taken into account. And that the grant of a CSOP option, which causes the EMI individual limit to be exceeded, can be a disqualifying event in relations to the EMI option. Currently these limits are £250,000 for the individual and three million for the company for EMI schemes, £30,000 per person for a CSOP.

Finally, another issue that we see is failure to include a summary of the restrictions on the shares in the EMI option agreement. There should be a brief list of any restrictions on the shares detailing where they can be found. For example, in the company’s of articles of association, which should be enclosed in the option agreement. This is not always fatal and HMRC tend to take a pragmatic view.

If you’re in any doubt, or find that this is the situation with your EMI options, please contact your solicitors.

Ian advises both public and private companies on the design, implementation and operation of the full range of share-based incentive plans, in particular tax-favoured arrangements.

Ian also advises on the share schemes aspects of IPOs and a broad range of international M&A transactions. He has considerable experience in relation to employee benefit trusts and of advising senior executives on the impact on their awards of changing employer.