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How to set up an Enterprise Management Incentive Scheme (EMI)?

We are general practitioner accountants with reasonably good tax skills, but we are not full-time tax specialists.

We are meeting with a client to discuss incentive schemes for key employees, and will be looking specifically at setting up an Enterprise Management Incentives (EMI) scheme.

Is setting one of these up something that would be relatively straightforward for us to handle, or is it necessary to get a tax specialist with experience of EMI's to handle it?

Thanks for advice on this.

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It's not especially difficult

I've done these in the past.  The option agreement itself needs to be dratfted by a lawyer, but they will have access to standard documents that they can use, although I don't suppose it will be cheap.

You'll then need to agree the current share value with HMRC, so that you can show later on that the option price is at least equal to the market value at grant (unless it isn't).

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24th Jul 2012 17:51

It can be .....

The tax aspects of the scheme are actually relatively straightforward in that it isn't difficult to check whether the client meets the scheme rules.

The complicated bit isn't really in drafting the agreement (you don't actually need a lawyer in fact I've just been sorting out a scheme a blue chip law firm made some 'errors' in) - but comes down to discussing the options open to the client, explaining the alternatives (vesting schedules, option prices etc) and then putting it on to paper.  You also need to have an eye on the Companies Act and related shareholder issues, which ties in with the drafting.

It is also advisable to agree the value with HMRC - you don't have to and the EMI 1 asks whether you have done so - but in practice I always would. 

My advice would be to get a specialist in (but I would say that, I am one) as while the obvious tax side is, as I said straightforward, the tricky part starts once you have done that bit.

If you are interested, do pm me.

 

 

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26th Jul 2012 08:42

and to continue

sorry, just to finish what I started earlier, if this is something you think you will be doing regularly, I'd be happy to 'mentor' you through the process and leave you with a template set of documents at the end. In this way not only does your client get good advice but in my experience this will then make you feel comfortable about taking it on for other clients.

As I said, and others have echoed, it is the commercial aspects of the scheme that are more difficult to deal with.

regards

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Agree

If it's something you think might benefit several clients and so will be advising & setting them up on a regular basis then it's a good string to your bow and there's quite a bit of information out there.

I toyed with the idea a couple of years back but it would have been a one-off and so I found an excellent local firm who talked the client through it all and enabled me to stick with what I enjoy doing (growing veg).

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25th Jul 2012 13:23

Buy the scheme documentation

If you hunt around on the web you will find that you can buy the basic documentation needed to set up an EMI scheme.  It costs between £100 and £200. You can then alter these documents to suit the specific needs of your client and the requirements of the company's articles.

Once an EMI scheme is in place an EMI annual return to HMRC is required.

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30th Jul 2012 12:22

EMI scheme

I would exercise extreme caution in buying documentation off of the Web unless you're buying the expertise to implement the scheme as part of the package.

It's akin to buying documentation for any other transaction without really understanding the implications (e.g wills).

Often it's not the implementation of schemes that causes difficulty but subsequent transactions that aren't catered for in the documentation.

In the end you get what you pay for.

 

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25th Jul 2012 13:56

Tax?

Whilst tax is an interesting and attractive aspect to an EMI Scheme, you've got to first of all help the client to think about what they want to achieve from an incentive scheme. Are they comfortable giving away equity at some point, if so how much, by when, and under what circumstances.

It should be more of a commercial discussion than a tax led discussion in my view.

That said EMI tends to be the best equity style incentive scheme for companies and individuals that qualify.

I'd echo the sentiment that if you're confident on drafting documents a lawyer isn't actually a requirement, but if you're not I'd suggest a lawyer or more experienced accountant is a good idea.

You can take inspiration from the template on EMI that Simply Docs have but don't be led by it.

There's also agreeing a valuation with HMRC - the difficulty of which seems to be related to their workload!

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By dwgw
30th Jul 2012 12:36

Yes you can, but be careful.

Agree with the comments re commercial requirements being paramount.  EMI is generally the best equity based scheme for SMEs but the prior question is whether equity is appropriate and, if it is, what sort?  If the real need is only for income incentives then a simple bonus or phantom share arrangement will be more appropriate (and probably cheaper), unless the company is prepared to allow the EMI options to be exercised early.

If early exercise of options is OK, it'll be hard to beat EMI whether the desire is to enhance income or provide a share of equity.

If EMI options are used, does there need to be a different class of share to preserve existing shareholders' entitlement to, say, existing reserves or freehold property etc?  Is entrepreneurs' relief desirable, so voting shares are needed etc? 

In my experience, explaining the EMI scheme to both employer and employees and tailoring it to the employer's requirements is usually the most challenging (and time consuming) aspect, so don't underestimate this "soft" side when pricing the work.  I also make it a rule to agree the share valuation with HMRC (don't think I've ever not done so).

The documentary process is relatively straightforward but there are lots of traps to be avoided (I have some war stories) and I'd be very careful about downloading legal templates from the internet.  I've prepared EMI legal docs but prefer not to - I'm not a lawyer so why take on the lawyer's risk?  It's a good referral opportunity after all.

On the whole, I agree with the drift of the advice above.  If this is a one-off, find a specialist (which certainly isn't necessarily a big firm).  If you want to build a service yourself, find a mentor - or employ a specialist! 

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03rd Dec 2013 21:12

Backdating EMI SCheme

Can I just ask if it is possible to backdate EMI agreements? The scenario is that the terms of an option were agreed several months ago but a valuation has been in negotiation with HMRC. Now the timetables means that, once valuation is in, there may be less than a year between Options being granted and potential sale. Any advice or direction gladly received.

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By Alex997
19th Jun 2015 12:37

EMI Scheme guide

We recently hired a tax expert specifically for EMI Scheme consultancy and implementations as we didn't have the knowledge in house. 

He wrote us a nice article on EMI Schemes which may help you with some of your questions.

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