The Government has announced two important matters relating to Enterprise Management Incentives (EMI). EMI are tax advantaged share options offered by small and medium sized companies to their employees. In a recent press release dated 20th August 2009 HMG stated that:-
1. The UK Government had a legal obligation to demonstrate that the rules governing EMI complied with the appropriate EU guidelines and treaties regarding the provision of State Aid. The Government has convinced the European Commission that the EMI plays a crucial role in enabling small firms to recruit and retain the highly skilled employees they need and the Commission has agreed that state aid approval should be extended for EMI until 2018.
2. The detailed EMI eligibility criteria contained in UK tax legislation will be widened so that companies based in the UK which carry out considerable overseas activity can offer EMI to UK-based staff . Previously such companies could not grant EMI options.
1. EMI options over shares worth up to £120,000 can be granted to employees of SME's. Employees are able to exercise the options and acquire shares in the company at a discount to market value at the date of exercise.
Without specific legislation to achieve this effect, the employee would pay income tax and NICs on the difference between the acquisition price under the option and the market value at the date of exercise (the option gain), whilst the employer would be subject to employers' NICs on the option gain. Under EMI, both employees and employers are exempt from this tax liability.
2. The current EMI eligibility criteria require a qualifying company's activities to be "wholly or mainly" in the UK. This will be relaxed so that a company is only required to have a "permanent establishment" (i.e., some taxable presence) in the UK. This will help UK SMEs with substantial overseas activities to recruit highly skilled UK-based staff. It will also allow UK tax-paying staff of overseas SMEs that have a permanent establishment in the UK to benefit from EMI.
The state aid approval brings a period of certainty to this valuable employee incentive which should be welcomed. Also, the extension of the eligibility criteria to non-UK resident companies carrying on business here through a UK permanent establishment and UK-based companies with extensive overseas operations is similarly welcome. Such SME's should reconsider whether this valuable incentive is now available to their staff. It would, particularly at a time when the economy is struggling to recover, perhaps be sensible for HMG to consider relaxing further the complex eligibility criteria such as the £30m gross assets limit on qualifying companies. Much of the value in EMI lies in the ability of the company to tailor specific option terms for specific employees thus enabling key staff to benefit in growth in value of the business without the difficulties associated with managing minority holdings.
The press release states that Employees of overseas SMEs who are not subject to UK tax will not be able to benefit from the tax relief offered by EMI.