As part of the Budget’s theme of encouraging enterprise, the Treasury issued a call for evidence on EMI and other tax advantaged share plans.
In a welcome move, the Government announced a call for evidence on expanding the Enterprise Management Incentive (EMI) scheme to offer better support to growth companies. EMI plans allow eligible companies to grant selected employees tax-advantaged options over shares worth up to £250,000 per person (£3 million in total for a group). For employees, options can be exercised free of income tax and NIC if certain conditions are met on the date of grant, and continuously until the date of exercise. When shares are subsequently sold, there are additional relaxations to the normal criteria to qualify for business asset disposal relief, which mean that the capital gains tax rate on the taxable gain can potentially be reduced to 10 percent. From the employer’s perspective, there is a potential employer’s NIC saving when options are exercised as well as, usually, a statutory corporation tax deduction for any growth in value of the underlying shares.
What is the aim of the call for evidence?
The Government announced that it would examine whether the EMI scheme provides appropriate support to growing entrepreneurial companies, and whether more companies should be able to grant EMI options.
There are several potential barriers to qualifying for EMI.
EMI is aimed at smaller companies, as eligibility criteria include caps on gross assets (which cannot exceed £30 million) and on the number of full-time equivalent employees (which must be under 250).
Eligible companies or groups must have a UK permanent establishment and carry on a qualifying trade. Most trading activities qualify, but there are some notable exclusions, including dealing in investments or land, banking, insurance, hire-purchase financing or other financial activities, leasing or receiving royalties or licence fees, providing legal or accountancy services, certain property-backed trades and shipbuilding, coal and steel production.
As well as the exclusion of certain trades, there can be other practical problems that deny companies access to EMI. In particular, the requirement that a company is not controlled by another company can mean many private equity backed companies or companies owned by a family investment company are not eligible. Further, the rules on ownership of subsidiaries can mean that groups that enter into joint ventures can potentially fail the eligibility tests.
Eligible employees must generally work for the company or group for at least 25 hours per week or (if less) for at least 75 percent of their total working time. Additionally, EMI options cannot be granted to an employee who controls (or is ‘connected’ with a person who controls) 30 percent or more of the company’s ordinary share capital.
What could be the outcome?
It appears that removing some of the barriers that smaller high growth companies face in accessing EMI is a focus of the consultation.
However, the document also asks for views on the impact on recruitment and retention for companies that outgrow EMI, suggesting there may be some appetite to enhance some of the other tax-advantaged share plan alternatives (for example the Company Share Option Plan has had the value of tax-advantaged employee share options capped at £30,000 per employee for a long time now).
Employers who currently use EMI, and those who could benefit but do not meet the current criteria, should consider participating in this call for evidence to ensure their views and experiences are taken into account.
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