EMI consultation: share your views on possible expansion

This post is part of our Entrepreneurial team’s regular series of blogs.

One of the somewhat unexpected outcomes of the Budget on 3 March was the announcement of a consultation into the Enterprise Management Incentive (“EMI”) scheme. The EMI scheme, as noted in previous blogs, is a key tool for high-growth companies in recruiting and retaining employees.

Although there were many calls from industry bodies and professionals for a consultation on the scope of the Enterprise Investment Scheme (“EIS”), the Chancellor chose instead to focus on EMI, seeking evidence on whether the scheme should be expanded and how it could be expanded to best support high-growth companies.

The consultation is open and is seeking evidence on the following points:

  • Whether the scheme currently meets it policy objective of helping companies to recruit and retain employees.
  • Whether the scheme is meeting its objective of helping SMEs grow and develop.
  • Evidence on which aspect of the scheme is most valuable in helping SMEs with their recruitment and retention objectives.

The ways in which the scheme could be expanded could result in an extension of the qualifying trade criteria regarding the type of trade undertaken by a company, or perhaps the limits relating to the value of options a company can issue or an individual can hold, or less likely, an extension of the tax advantages, for example in relation to Business Asset Disposal Relief. Currently the limit of Business Asset Disposal Relief is £1 million, in line with the reduction from £10 million to £1 million for all eligible capital gains. It appears from the consultation document that one of the key areas for potential expansion would be regarding the limits imposed.

Further, the document asks whether the other tax-advantaged share schemes offer sufficient support to high-growth companies where they no longer qualify for EMI. We have recently commented on the use of CSOP as an effective tool, however, whether this is of much use once the EMI limits have been breached is questionable. The flexibility of EMI certainly makes it the most advantageous scheme and many companies will go on to use a form of growth share scheme once the EMI limits are reached, in order to ensure the highest growth opportunity for employees.

We will, of course, be responding to the consultation and encourage businesses who have used the scheme to either respond directly with evidence or get in touch with us if they wish to feed into our response.

If you have any questions on the consultation or how to provide evidence, please contact me as I will be collating our response.

EMI for start-ups: no time like the present to start-up your scheme

This post is part of our Entrepreneurial team’s regular series of blogs.

With each passing year it seems that start-ups become ever more prevalent.

Although the economy has been disrupted by the Covid-19 pandemic, the technology industry has experienced considerable growth. Entrepreneurs are seeing the opportunities that remote working brings and are looking to take advantage of gaps in the market. With the technology sector not looking like it is going to slow down anytime soon, how can your start-up find the difference that will ensure that it succeeds against all of the competition?

Although there is not one ultimate answer to success, having the right team is crucial. In fact, not having the right team has been found to be one of the top reasons for failure among many start-ups.

This is why the Enterprise Management Incentive (“EMI”) option scheme is such a valuable tool for young, growing businesses. With a work environment that often requires substantial commitment and hours, but with limited funds to reward employees for their efforts, granting tax advantageous EMI options can be a way for companies to attract and keep that team that will lead them to success.

So, when is the best time to start thinking about granting EMI options? Arguably the sooner the better. EMI options are granted following a valuation of the company’s shares which is agreed with HMRC. With unapproved (e.g. non-EMI) share options, the employee is subject to income tax and national insurance contributions on the difference between the value of the shares when the option is exercised and the option exercise price they pay, but with EMI options there is no income tax and national insurance charge due on this gain (as long as the exercise price is equal to or higher than the pre-agreed market value) – i.e. the gain made between the dates the options are granted and exercised is free of income tax and NICs (but it will be subject to the, lower, capital gains tax  charge – see below).

There will be capital gains tax on the eventual sale of the shares obtained through the options, but if 2 years have passed between the date of the grant of the options and the disposal then the EMI option holders may, if they qualify, be able to claim Business Asset Disposal Relief (previously Entrepreneurs’ Relief), providing an effective tax rate on the gain of only 10% on the first £1m of gain per individual.

So, with your employees having the prospect of reaping these rewards further down the line, EMI options are a valuable tool for incentivising staff and driving growth in your company.

If you are a very new start-up and, therefore, pre-revenue and yet to raise external investment (other than perhaps from friends and family) there really is no time like the present for incentivising and rewarding your current employees or encouraging others to join your team. In these circumstances, this can lead to a very low valuation of the shares for the purpose of granting EMI options; possibly the nominal value of the shares (usually 0.01p depending on what your share capital is divided into).

EMI option schemes are also worth considering at a later stage after initial investment has already been raised. In many cases, a company might issue options every year as a recruitment and retention tool. EMI schemes are a cost-effective and tax-friendly way for SMEs to incentivise employees, where the value of the company is expected to increase dramatically as the company grows.

If you are a start-up and have already started thinking about the best ways to incentivise and build your team or if you are further along in the process and want to grow your company even further, EMI options should always be considered. If you would like to pursue the possibility of this, please contact us in the Entrepreneurial Tax team here at C+T and we would be very happy to help.

New blog: my time working in the Entrepreneurial Tax Team

Mid-way through my third year at university, summer internships seemed to be on everyone’s mind. Most people I knew were talking about the roles that they had applied for and how important internships were for putting you in a good starting position post-university. Doing an internship seemed like a great idea, it would provide me with an interesting way to fill my 3-month summer break, learn more about the working world and develop new skills. Having enjoyed the brief two weeks of work experience I had done with Chiene + Tait the previous summer, an internship with the entrepreneurial tax team seemed like the ideal opportunity.  I applied and was thrilled when I was offered an interview and even more thrilled when I was offered a six-week position with the firm.

Going from university to working at Chiene + Tait took some adjustment. I’m currently studying Economics and Modern History and I thought when I first joined the firm that studying these subjects would be vastly different to working in an accountancy firm. At university I only have around six contact hours a week  (I’m sure the English and international students must wonder what they’re paying for a lot of the time) and, although the lack of teaching time does mean a significant amount of independent study and long days spent in the library, it is often quite an unstructured working environment. Joining the firm this summer has given me an insight into what my working life could be like. I have also found that although some of the knowledge I have gained from university may not always be useful (or who knows maybe one day that modern history essay on the cultural impact of the miniskirt will come in handy), the skills I have gained often are.

‘So, what actually is entrepreneurial tax?’ A question I have been asked many times by my friends and family since starting my internship at Chiene + Tait this summer, and one that I struggled to fully answer at first. Over the past three weeks I have quickly learned what a job in entrepreneurial tax entails (although from writing this blog I’m beginning to realise that I may never learn how to spell entrepreneurial), and I have seen the great work that Chiene + Tait does for growing businesses. Throughout my time here I’ve been assigned interesting and engaging work to do with the various schemes available to companies and investors. From Enterprise Management Incentives (EMI) to Enterprise Investment Schemes (EIS) and Research & Development Tax Credits the variety of work I have been assigned has been challenging but also enjoyable. It has shown me just how many fascinating companies the firm deals with.  I’ve even attempted some Corporate Tax which I think I might be finally wrapping my head around. In just three weeks my knowledge of Entrepreneurial Tax and other types of tax has grown substantially, and I can now provide a more detailed answer when people ask me what entrepreneurial tax is.

The work and type of clients have been very interesting but above all, being made to feel part of such a friendly team has made the whole experience very enjoyable.