30th January 2019
Enterprise Management Incentive (EMI) schemes are one of a number of employee share option schemes designed to enable smaller, growth companies in the UK to recruit, retain and motivate their employees. Businesses use EMI schemes to provide their key employees with the option to acquire shares in the employer’s company at a fixed price at some point in the future.
The tax-advantaged status of EMI schemes is only available to independent trading companies with fewer than 250 full-time employees and gross assets of no more than £30 million.
As long as a scheme meets certain requirements, neither income tax nor national insurance will be payable by the employee on the grant or exercise of the option and only capital gains tax will be payable by the employee on the sale of the shares. The employee may also be able to claim Entrepreneurs’ Relief. A corporation tax deduction may be available to the employer when EMI options are exercised.
Under European ‘State aid’ rules, members of the EU are prohibited from using state resources to provide aid or benefits to companies on a selective basis, without receiving prior approval from the European Commission. The tax-advantaged status of EMI schemes falls within this prohibition and must therefore be approved by the European Commission.
In May 2018, the European Commission approved the UK’s EMI scheme for a further 5 years. Predictably, however, the European Commission’s decision applies until the UK ceases to be a member state of the European Union. So this begs the question: What will happen to EMI schemes post-Brexit?
The immediate impact on EMI schemes is likely to be minimal.
Theresa May’s withdrawal agreement contains provision for a transitional period until at least the end of 2020, during which the UK will continue to be subject to the current State aid rules.
In the absence of a withdrawal agreement, the proposed new UK State aid rules largely mirror the current rules and will need to be in place from 30 March 2019.
The Competition and Markets Authority (CMA) is to take over the European Commission’s role in monitoring and enforcing State aid rules in the UK once the current rules cease to apply.
The tax-advantaged status of EMI schemes will not require re-approval from the CMA, so Brexit should have no impact on EMI schemes in the short term.
Longer term, it is impossible to predict with any degree of certainty the future of EMI schemes as this is a question of policy. For the time being at least, the government appears content for the tax-advantaged status of EMI schemes to continue and indeed in September 2018, Mel Stride - Financial Secretary to the Treasury – expressed that the employee ownership schemes (of which EMI is one) have been implemented “with great success” and he also highlighted that 3,500 employees were offered EMI schemes in 2016 – 2017.
In addition, an HMRC commissioned survey to evaluate the EMI scheme, concluded that there is “substantial evidence that EMI is fulfilling its core aims of improving recruitment and retention prospects for SMEs and supporting their future growth” and “…firms did perceive EMI to have helped with retaining staff”.
In the event of a Labour government, share schemes hold sway in general. John McDonnell, the Shadow Chancellor, unveiled radical new plans at the Labour Conference in September 2018 to force all companies with 250 or more employees to give workers shares worth up to £500 a year each.
Whilst the tax-advantaged position of EMI schemes appears to be here to stay post Brexit at least for the short term, one thing that is clear is that there is cross-party consensus to the fact that employees owning shares in their employers’ companies is a good thing. However, the parties are by no means agreed as to how this is best achieved.
Any company considering granting EMI options to its employees will understandably be concerned about what happens in the event that EMI schemes lose their tax-advantaged status. It appears likely that the government would take the same approach as when it abolished another flexible scheme known as “Employee Shareholder Status”. That is to say, schemes granted before a given date will retain their tax-advantaged status and only future schemes would no longer be tax-advantaged.
So it appears that it business as usual, at least for the time being, when it comes to EMI schemes.
The contents of this update are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this update.
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