EMI schemes: the benefits and pitfalls

14 November 2025 | posted in Commercial law Corporate and business law Dispute resolution Employee share schemes Employment law Family law Immigration law Media and entertainment law Music law Private client law Property law

This insight is part of our Business Law newsletter | Autumn 2025 series. Explore the full series at the end of this piece.

Enterprise management incentives (EMIs) were introduced 25 years ago and were an instant hit: a share option scheme that gave valuable tax advantages to employees, which was flexible and aimed at the SME market.

It has been copied across the EU and HMRC’s own surveys of businesses highlight the competitive advantage that EMI gives them.

A valuable benefit

One of the standout features of EMI was that, unlike the older tax-advantaged share schemes, there was no need to get the terms of the option plan checked and approved by HMRC. As long as the requirements of the legislation were met, the options would qualify for tax relief.

Pitfalls for the unwary

This flexibility saw EMI schemes start to include features not permitted under the older plans: wide use of discretion around the treatment of leavers and the timing of exercise. To qualify for relief under the EMI code, an option must be granted under an agreement that meets the requirements of the legislation, the options must be notified to HMRC in a timely manner and any purported exercise of the options must also be undertaken in compliance with the terms of the scheme.

Under the microscope

Because EMI is such a valuable relief, it comes under scrutiny where options will be exercised as part of a transaction. Sharp-eyed specialist tax professionals doing due diligence on a transaction often pick up points that HMRC or a general practitioner might have overlooked.

While we have been doing due diligence for buyers in recent transactions we have seen instances where EMI options that have been implemented by the sellers have failed for several reasons. In one, the option was expressed as a percentage of the share capital. This means it failed the basic requirement of the legislation that the maximum number of shares under option must be stated in the option agreement.

In another transaction, it was found that only some of the options had been notified to HMRC and that it was years too late to make a late filing application. This caused friction because some of the team held validly notified options and would benefit from EMI tax treatment, while others paid PAYE and NIC when they exercised their options.

However, the most frequent failure is that the terms of the option do not allow it to be exercised.

A particular problem arises with performance conditions. Very often, things that seem important when an option is granted are side-lined during the life of the option. In an SME context, if an employee is not performing well, they might well be looking for a new job. The best measure of a team’s performance is the final value realised by shareholders when the company is sold. The terms of the option may allow the board to exercise a discretion to allow the options to be exercised. However, this must be clearly provided for in the option documents and HMRC’s guidance on the legitimate use of discretion needs to be considered.

Check with the experts

EMI is a valuable benefit for your employees but must be properly specified and implemented carefully. There have been material changes to HMRC’s views on the use of board discretion in an EMI plan that may catch some employers out. It would be worthwhile to have the terms of an existing scheme checked to highlight any problems.

To have your current scheme checked over or to find out more about how EMI could work for your business, contact our share scheme experts.

This article is provided for information purposes only. It does not constitute legal advice and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances.