What Are EMI Option ways to make money as a teen Schemes And How Do They Work

Essentially, qualifying companies can set up an EMI scheme whereby options ways to make money as a teen can be granted over shares to qualifying employees worth up ways to make money as a teen to £250k (each employee) without giving rise to an income tax or NIC charge. They also allow the employee to purchase shares in the ways to make money as a teen company for a discounted value. The total value of shares in a company which may ways to make money as a teen be subject to unexercised EMI options at any time is ways to make money as a teen £3 million.

The options allow the employee to exercise (i.E. Buy the shares) at the market value of the shares when the options ways to make money as a teen were granted – the intention being that when the options are exercised the ways to make money as a teen market value of the shares is higher, therefore the employee has received the shares at a discount. When the shares are eventually sold by the employee they ways to make money as a teen will be liable to capital gains tax (“ CGT ”) on any gain over the market value at grant and ways to make money as a teen qualify for entrepreneurs relief meaning an effective CGT rate of ways to make money as a teen 10%.

While there is no income tax liability on the grant ways to make money as a teen of an EMI option, there may be an income tax liability on exercise. If the exercise price was less than the market value ways to make money as a teen at grant, then income tax is due on the difference between the ways to make money as a teen exercise price and the market value at grant. This is the reason why companies ensure they agree a ways to make money as a teen valuation with HMRC before granting the options so they can ways to make money as a teen be sure the exercise price will be at least the ways to make money as a teen market value per share at grant and employees won’t suffer any income tax liability on exercise.

Broadly, the national insurance contributions (“ nics ”) treatment of EMI options follows the income tax treatment in ways to make money as a teen that there will be no nics if no income tax ways to make money as a teen is due, but there will be such contributions due if income tax ways to make money as a teen is payable and the shares are readily convertible assets. The employer and the employee may enter into arrangements under ways to make money as a teen which the employer nics liability is transferred to the employee.

Qualifying trades are any that are not investments in land, shares or financial instruments, financial services, leasing assets, licence/royalty fees receipt, legal/accountancy services, property development, farming or forestry. Qualifying employees are those who work full time (defined as at least 25 hours per week or for ways to make money as a teen at least 75% of their paid working time) and do not hold more than 30% of the company’s shares.

A valuation of the company will also be required to ways to make money as a teen establish the market value of the shares. The valuation is then often agreed with HMRC (see further below). The main circumstances in which a valuation is required include ways to make money as a teen on 1) grant of the EMI options (the tax market value of the unquoted shares on grant ways to make money as a teen is required in order to calculate the £250,000 limit applicable to EMI options, to complete the HMRC notification form following grant and to ways to make money as a teen determine whether there will be a tax charge on exercise) and 2) exercise of the EMI options (if an income tax charge arises on exercise the market ways to make money as a teen value of the shares on exercise needs to be agreed ways to make money as a teen with HMRC so as to calculate the tax due).

Share valuations vary depending upon the nature of the business ways to make money as a teen and the company’s stage of development. Factors that may be considered include the assets of the ways to make money as a teen company, the historic trading position, dividend yields, comparable price earnings ratios, any recent investment rounds or offers to acquire the company ways to make money as a teen and comparable selling prices of similar companies in the sector.

The option scheme rules and agreement can contain good and ways to make money as a teen bad leaver provisions that avoid an employee leaving and taking ways to make money as a teen shares with them. These provide that on an employee leaving a company there ways to make money as a teen is an automatic transfer of shares held by that employee. Employees will be treated as good leavers (typically on death, disability and sometimes, redundancy) or bad leavers (dismissed for other reasons or resigning). Good leavers typically get “fair value” and bad leavers get par value or the price paid ways to make money as a teen on subscription if higher.

The scheme rules also include detail about how and when ways to make money as a teen the options can be exercised and can relate to certain ways to make money as a teen performance targets being met (by the company and/or the employee), the employee having remained employed for a specified period, or upon the sale of the company. The options may also lapse and be forfeited if the ways to make money as a teen employee tries to assign them or grant security over the ways to make money as a teen options.

After the share options have been granted, ‘vesting’ commonly refers to the period over which an employee accumulates ways to make money as a teen more of an entitlement to the beneficial interest of a ways to make money as a teen share option in advance of (and subject to) an exercise event. For example, an option granted may vest over a four year period, following which it may be exercised in whole upon the ways to make money as a teen exercise conditions being met (for example, in an exit only scheme, the company being sold). Sometimes the vesting period is preceded by an initial ‘cliff’ period whereby there is no vesting of the option.

The vesting period can be up to 10 years (exercise has to happen within 10 years from grant) and the vesting frequency is usually either monthly, quarterly, or more often annually. For example, a key employee may be granted options that entitle them ways to make money as a teen to up to 5% of the company’s share capital on an exit event, with the option vesting as to 1% of the company for each year over a five year ways to make money as a teen period, following which the option becomes exercisable once there is an ways to make money as a teen exit event.

Its not necessary, but as good practice some advisers we know as a ways to make money as a teen matter of course seek advance assurance from HMRC that the ways to make money as a teen EMI option scheme qualifying criteria are met. Such advance assurance and dialogue with HMRC would be particularly ways to make money as a teen useful if there is a question in respect of a ways to make money as a teen company’s situation which the rules do not give a clear ways to make money as a teen answer on (e.G. If the company is not sure it meets either the ways to make money as a teen independence, qualifying subsidiaries or gross assets tests). An advance assurance application is made by preparing and sending ways to make money as a teen a letter to HMRC together with supporting documentation.

Each application should include the company’s registered office address, registered number, corporation tax reference, a copy of the latest available accounts for the company ways to make money as a teen and each of its subsidiaries with a permanent establishment in ways to make money as a teen the UK, a copy of the up-to-date articles of association and details of all trading or ways to make money as a teen other activities carried on by the company and its subsidiaries.

The EMI contractual documentation used must contain details of any ways to make money as a teen restrictions (e.G. Obligatory buy back rights that the company can exercise if ways to make money as a teen conditions are met) that will apply to the shares that will eventually be ways to make money as a teen issued (or transferred) to option holders on exercise. HMRC guidance published in july 2016 means that it is ways to make money as a teen not sufficient that such restrictions are only set out in ways to make money as a teen a company’s articles (and/or shareholders agreement), but that they are also cross-referenced and summarised in sufficient detail within the body of ways to make money as a teen the EMI option agreement itself.

Since 6 april 2014 employees need to provide a written ways to make money as a teen declaration that they meet the 25 hours a week / 75% of paid time “working time” EMI requirement. This declaration can be a standalone document or be integrated ways to make money as a teen within the employee’s EMI option agreement. The company granting the options also needs to ensure that ways to make money as a teen the employee is provided with a fully executed copy of ways to make money as a teen this declaration within seven days of it being signed.

From a tax perspective, the scheme must be registered with HMRC within 92 days ways to make money as a teen of establishment and there is an identical timeframe for notifying ways to make money as a teen HMRC of any options being granted. There is an annual return (known as an EMI40) that must be filed by 6 th july following the ways to make money as a teen end of the tax year. The scheme registration, option notification and EMI40 filing must take place online (since 6 april 2014) via HMRC’s ERS service and failure to notify/file can lead to the scheme being cancelled and the ways to make money as a teen tax advantages being lost.

While its true that you don’t have to involve HMRC in agreeing a valuation for ways to make money as a teen the purpose of your EMI option scheme, in our experience it is very much recommended and we ways to make money as a teen strongly advise that all companies make use of HMRC’s share valuation advance approval service. Obtaining such agreement from HMRC at the outset provides certainty ways to make money as a teen on the tax treatment of the options and also that ways to make money as a teen any grant of options are within HMRC’s EMI limits.

We often come across companies who have made various EMI ways to make money as a teen valuation mistakes. Some don’t get a valuation agreed with HMRC at the time ways to make money as a teen the options are granted, while others will obtain agreement from HMRC on their valuation ways to make money as a teen but then grant the options outside the typical 60 day ways to make money as a teen HMRC approval window. We have seen a few startups do their own valuation ways to make money as a teen that is based on a recent investment round they’ve carried out. This results in an unnecessarily high value being used for ways to make money as a teen setting the option price and reporting those values to HMRC. Regardless of what value they raised money at, the same companies could have agreed a much lower valuation ways to make money as a teen with HMRC and therefore significantly lowered the buy in costs ways to make money as a teen for employees and/or tax liabilities on exercise.

Without an agreed HMRC valuation, a company is likely to have its historic market values ways to make money as a teen questioned meaning there will be a risk that the options ways to make money as a teen were granted at a discount or that the EMI limits ways to make money as a teen were exceeded at grant. This uncertainty is likely to be raised as an issue ways to make money as a teen by any experienced investors or any buyer of the company ways to make money as a teen when they are undertaking due diligence. We have also seen key employees put off from joining ways to make money as a teen a company because they do not have confidence in the ways to make money as a teen robustness of the EMI options they are being offered.

The EMI option tax breaks can be lost on the ways to make money as a teen happening of certain “disqualifying events” after EMI options have been granted. Failure to exercise an EMI option within 90 days of ways to make money as a teen the happening of such an event can cause some of ways to make money as a teen the option gain to be taxed at higher income tax/NIC rates. In addition, if a disqualifying event occurs within the first twelve months ways to make money as a teen of the grant of an EMI option, then the option holder will lose the benefit of the ways to make money as a teen 10% rate of capital gains tax via entrepreneurs’ relief.

We advise on and produce appropriate EMI share option schemes ways to make money as a teen on a fixed fee basis, usually for £3,000 plus VAT (for the full service as listed below). To-date all the schemes we have worked on have been ways to make money as a teen put together without the need for face-to-face meetings, although we would be happy to meet you if you ways to make money as a teen happen to be based near our sussex office. The aforementioned fixed fee includes the following assistance provided from ways to make money as a teen us:

• putting together an EMI option agreement or separate EMI option ways to make money as a teen scheme rules and an option certificate (together with a notice to exercise) for each employee, the later more apt if the company intends for several ways to make money as a teen employees to join the EMI option scheme. Such contractual documentation can provide that the grant of EMI ways to make money as a teen options are exercisable either based on time vesting, performance measures or on an exit/sale of the company and will include good and bad ways to make money as a teen leaver provisions to protect the company in the event the ways to make money as a teen employee leaves.

So although ant has been fortunate in being able to ways to make money as a teen acquire shares for £15,000 that are eventually sold for £200,000, he has had to pay tax in aggregate of £64,000, most of which is payable well before he has received ways to make money as a teen any money for the shares (and which in any event might be lost altogether if ways to make money as a teen the shares once acquired then collapse in value).

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