Enterprise Management Incentives review extended
EMI will remain unchanged but tax-advantaged Company Share Option Plans will now be reviewed – we consider what this could mean for employers.
EMI will remain unchanged but tax-advantaged Company Share Option Plans.
No changes will be made to made to the Enterprise Management Incentives (EMI) regime following the Government’s recent review. However, tax-advantaged Company Share Option Plans (CSOPs) will now be reviewed to establish whether the CSOP regime should be reformed to support companies that cease to qualify for EMI. This article discusses what this might mean for employers.
The EMI review
At Budget 2020, the Government announced that it would review the EMI regime to ensure that it continues to support qualifying small and medium-sized companies effectively, and to consider whether more companies should qualify. As part of that review there was a call for evidence to which companies and advisers, including KPMG, responded (see our previous article which summarises our submissions).
What was the outcome?
The Government announced at the Spring Statement 2022 that they believe the EMI regime “remains effective and appropriately targeted”.
It therefore appears unlikely that any changes will be made to which companies can qualify for EMI, or to the financial limits that apply to EMI options. That said, we hope that HMRC will still be able to review and improve operational aspects of EMI that can currently present administrative challenges for employers.
Whilst this outcome is likely to disappoint employers who do not qualify for EMI, or who expect to cease to qualify, the Government also announced that the tax-advantaged CSOP regime will be reviewed to consider whether it should be reformed to support companies “as they grow beyond the scope of EMI”.
What could a review of the CSOP regime mean?
Broadly, both EMI and CSOP options give employees the opportunity to benefit from growth in the value of the underlying shares at more advantageous capital gains tax, rather than income tax, rates.
Therefore, employers that do not qualify to grant EMI options, either because they never satisfied the qualifying conditions or they have ceased to meet the requirements, can potentially grant tax-advantaged share options under a CSOP in place of EMI. However, CSOP options are relatively inflexible compared to EMI options, and are subject to much lower financial limits.
Additionally, although there are no restrictions on the trading activities of companies that can grant CSOP options (unlike for EMI options), due to current restrictions on the class of shares that can be used, not all companies that outgrow EMI could implement a CSOP as a replacement.
Extending the EMI review to include CSOP is therefore a welcome development.
Although the Spring Statement’s announcement focused on potential CSOP reforms to support companies as they grow, in our view the review should also consider CSOP more broadly, and how it could potentially be improved for current CSOP users.
Additionally, a more flexible CSOP could encourage wider employee share ownership in larger employers for whom the current CSOP regime is too restrictive commercially.
What happens now?
The Treasury’s review is ongoing. However it’s possible that an update could be issued in the Autumn Budget.
In the meantime, employers should review their share plans to ensure they remain fit for purpose and continue to be a commercially effective incentive, aligning the interests of management and shareholders.
Employers who expect to ‘outgrow’ EMI in the foreseeable future (e.g. due to an increasing headcount) should consider whether they might be able to wait until the outcome of the CSOP review before considering what replacement to EMI might be appropriate (bearing in mind that any changes to the regime might not be made until April 2023 at the earliest), or whether an alternative equity incentive might be needed in the meantime.