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EMI and SIP – celebrations and challenges 20 years on

EMI and SIP – celebrations and challenges 20 years on

Two new tax-advantaged share plans came into existence in 2000. We look at their successes and challenges 20 years on.

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Liz Hunter

Director of Equity Reward, People Services, Tax

KPMG in the UK

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As companies seek to preserve cash, we look at how two share plans, considered innovative in 2000, remain relevant two decades later. 

EMI popular but problematic?

EMI is the most flexible and generous UK tax-advantaged share plan. It’s aimed at entrepreneurial companies and was introduced in 2000 with the objective of making the UK a world-leading place for in-demand skilled talent.

A key advantage is that gains realised under the plan are usually only taxed at a maximum rate of 10%, provided the shares are sold more than 2 years after the option was granted.

It is rightly the go-to plan of choice for companies that meet the qualifying criteria.

As you might expect though, there are on-going qualifying conditions and procedural requirements to be met throughout the life of an EMI option– meaning that when an exit ultimately materialises, there can be disappointment when due diligence unearths historic disqualifying events.

Examples of disqualifying events are set out in our fact card. There are simply too many bear traps to list in this article, but suffices to say if your EMI was implemented at a bargain price and not properly cared for since there may be a bigger price to pay downstream!

The use of EMI has evolved since its inception. The individual grant value limit has increased several times and currently stands at £250,000.  As a consequence, as growth businesses start to accrue significant value, there’s been increasing use of EMI not just as a plan in its own right, but also as a ‘wrapper’ over a class of Growth Shares in order to optimise plan headroom and incentive efficiency.

In the March 2020 Budget, the Chancellor stated that the Government would review EMI to ensure it provides appropriate support for high-growth companies to recruit and retain talent. Whilst the timing of that review is yet to be confirmed, it will also examine whether more companies should be able to access the scheme.

Why Share Incentive Plans (SIPs) are more relevant than ever before

This all-employee arrangement, favoured by larger employers, offers a modular approach to equity awards. The plan has four different components as explained in our fact sheet.

Whilst in recent years the offer of buy one Partnership Share and get a Matching Share too – an arrangement with tax and NIC savings for employer and employee – has been popular, we might start to see increasing use of the Free Share module.  

SIPs offer a way for employers to provide all employees with up to £3,600 worth of Free Shares per annum tax efficiently. Such awards can be made contingent on business performance and thus offer potentially tax-free reward across an entire workforce, to recognise continued loyalty and value add contribution at a time when cash pay may not be sustained in the manner originally envisaged.

In Australia, supermarket Woolworths has offered shares to 100,000 workers to recognise their efforts during the challenging trading conditions caused by coronavirus. Larger UK employers might follow this example as they focus on cash preservation, but come under pressure from government, investors and ‘court of public opinion’ to better share value creation in the years ahead.

What’s the next innovation?

We’re hearing about how, as a result of the pandemic’s impact, the UK is potentially facing an unsustainable debt mountain and consideration is being given to how to recapitalise this.

One school of thought is that the UK might start to recapitalise some of the mounting corporate debt by way of a new UK Sovereign Wealth Fund. Indeed, you might surmise that the design of the Future Fund had just such a future proposition in mind. It’s certainly ground-breaking for the UK government to be taking minority equity stakes in small innovative private companies.

Whilst Labour’s call for an Inclusive Ownership Fund may have had some flaws and fell by the wayside, now might be the time to recraft the concept. Perhaps, as part of a levelling up and progression towards a more inclusive economy, any such central, recapitalised equity fund could carry a requirement for a proportion of that equity to be returned to the wider portfolio business workforce, potentially via an employee ownership trust? 

© 2020 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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