EMI Scheme Setup and HMRC Valuation for UK Startups

EMI option scheme setup and HMRC valuation for UK startups.

Enterprise Management Incentives are the principal equity incentive tool for UK software and technology companies. Under <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">EMI</a>, qualifying employees can be granted options over up to £250,000 of unrestricted market value per person across a rolling three-year window, with the company holding no more than £3m of unexercised options in total. The qualifying company must have gross assets of no more than £30m, fewer than 250 full-time-equivalent employees, no excluded activities, and must meet the independence test. Option holders must meet a working-time requirement. At exit, <a href="https://www.gov.uk/business-asset-disposal-relief">Business Asset Disposal Relief is available at 18% from 6 April 2026</a> on qualifying EMI share disposals under the two-year rule, without needing the 5% personal-company test that applies to other shares. The scheme has a compliance cadence: the option grant valuation should be agreed with <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">HMRC Shares and Assets Valuation</a> before or at grant, each grant must be notified to HMRC, and an <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">annual ERS return must be filed by 6 July</a> after the tax year end, including a nil return where no events occurred.

The challenges clients face.

Granting options before checking the qualifying-company tests

A company that issues EMI options while failing the <a href="https://www.gov.uk/hmrc-internal-manuals/employee-tax-advantaged-share-scheme-user-manual/etassum52030">gross assets test</a>, the FTE ceiling, the excluded-activities test, or the independence test issues non-qualifying options. Those holders then face income tax on the difference between market value and exercise price at exercise, rather than CGT at exit. The qualifying tests must be checked before any grant, not after.

Setting an option price without agreeing the valuation with HMRC

The exercise price of EMI options should be agreed with <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">HMRC Shares and Assets Valuation</a> before or at grant. The agreed valuation fixes the amount of unrestricted market value used against the employee's £250,000 rolling limit and underpins the income tax position at exercise. Options granted without an agreed valuation carry uncertainty about whether the price meets the market-value requirement and whether the employee's limit has been correctly measured. Note: the VAL231 form URL previously cited now returns a 404 and should not be relied on; the process is currently routed through the <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">EMI guidance pages</a> and the <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">ERS manual</a>.

Missing the grant notification or ERS return deadline

Each EMI option grant must be notified to HMRC by the <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">6 July deadline</a> following the tax year in which the grant was made. An annual ERS return, including a nil return where no events occurred, must also be filed by 6 July. Missing either deadline is the most commonly encountered compliance failure in EMI schemes. Automatic penalties apply for late ERS returns.

Founders acquiring restricted securities without the 14-day section 431 election

Where founders or key employees acquire shares with restrictions (pre-emption rights, drag-along clauses, or other common startup provisions), those shares are restricted securities. A <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">section 431 joint election</a> must be made within 14 days of acquisition to be taxed on the unrestricted market value up front. Missing the 14-day window means income tax can arise later if restrictions are lifted, which is a well-documented funded-startup trap.

How we help.

Company and employee eligibility assessment and scheme documentation

We verify the company meets the <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">EMI qualifying tests</a> (gross assets, FTE, excluded activities, independence) and that each proposed option holder meets the working-time requirement. We design the scheme within the £250,000 per-employee and £3m per-company limits and prepare option agreements in a form that reflects the correct terms and conditions.

HMRC valuation agreement through Shares and Assets Valuation

We prepare the valuation submission to <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">HMRC Shares and Assets Valuation</a>, work through the process with HMRC to obtain a confirmed unrestricted market value, and document the agreed valuation basis. We use the <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">ERS manual guidance</a> for the process and do not publish or rely on the defunct VAL231 URL.

Grant notification, ERS returns and section 431 election management

We register the scheme with HMRC, notify each grant by the <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">6 July deadline</a>, and file annual ERS returns including nil returns. We maintain a grants register and monitor conditions affecting qualifying status throughout the life of the scheme. Where founders acquire restricted securities at a funding round, we identify the requirement and prepare the <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">section 431 election</a> within the 14-day window.

Common questions

Does my company qualify to grant EMI options?

The company must have <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">gross assets of no more than £30m</a>, fewer than 250 full-time-equivalent employees, and must not carry on excluded activities. It must also meet the independence test. Employees must spend at least 25 hours per week, or 75% of their working time, working for the company. We verify all of these before any grant is made.

How is the EMI option value agreed with HMRC?

The grant valuation should be agreed with <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">HMRC Shares and Assets Valuation</a> before or at the date of grant. This confirms the unrestricted market value that is used to measure the employee's £250,000 rolling limit and to determine the income tax position at exercise. The standalone VAL231 form URL that was previously used to submit valuations returns a 404; the current process routes through HMRC's EMI guidance and the ERS platform. We manage the submission through the current live route.

When do we have to notify an EMI grant?

EMI grant notification and the annual ERS return both run to the same <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">6 July deadline</a> after the tax year end. A grant made in May 2026 (2025/26 tax year) must be notified by 6 July 2026. A grant made in June 2026 (2026/27 tax year) must be notified by 6 July 2027. If no grants, exercises, or other events occurred in a tax year, a nil ERS return is still required by 6 July. Automatic penalties apply for late returns.

What is a section 431 election and when do we need it?

A <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">section 431 election</a> is a joint election between employer and employee to treat restricted securities as unrestricted for income tax purposes. Most startup shares carry restrictions (pre-emption rights, drag-along provisions) that make them restricted securities. Without the election, income tax can arise if the restrictions are later lifted. The election must be made within 14 days of the acquisition. Missing the window is one of the most common and most costly funded-startup tax errors.

Do I need to file an ERS return if no grants were made in the year?

Yes. If your company has a registered EMI scheme, an <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">annual ERS return must be filed online by 6 July</a> following the end of the tax year, even if no grants, exercises, lapses, or other events occurred. A nil return is still required. Failure to file on time results in automatic penalties.