finance 35


Re-invigorating Enterprise Management Incentive schemes


The chancellor should go the extra mile and return Enterprise Management Incentive (EMI) schemes to their old glory if he wants to boost growth, writes Cormac Marum, head of tax advisory for Harwood Hutton


When Gordon Brown introduced the EMI scheme in 2000 it was hugely popular and effective. Employees were granted options to acquire shares in their employer so, should the company be sold, they would benefit under taper relief from a 10% tax bill on the profit made. It certainly invigorated many management teams!


But when taper relief was abolished in 2008 and replaced by entrepreneurs’ relief only employees already holding 5% of the voting and equity rights in the company for 12 months before sale paid 10% tax. Everyone else has to pay tax now usually at 28%. Not such an incentive for employee shareholders and a real blow to EMI schemes.


So there was half a cheer for the chancellor when he announced that from April 6, 2013 he would re-invigorate EMI schemes. He proposed that employees who received shares through the exercise of an EMI option would qualify for entrepreneurs’ relief, and the benefit of 10% tax on sale, even if they held less than 5% of the voting and equity rights in their employer company. But, as the Treasury made clear, this still leaves the 12 months rule in place.


Realistically, this helps EMI option holders very little. The beauty about the original EMI schemes was that employees had no minimum shareholding threshold and agreed to pay the market value of the shares on a minority value basis as at the date of grant. But they only had to pay that sum on the eve of sale when they would receive sale proceeds on a much higher full value basis and pay just 10% capital gains tax on the difference. The employee did not have to take a financial gamble and buy the shares well in advance of any sale materialising. This was fair because only small unquoted trading companies qualified for EMI


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status and such investments are notoriously risky.


Now under the chancellor’s current proposals an employee has to gamble financially. He or she has to find the cash to exercise the EMI option and receive the shares at least 12 months before the anticipated sale. Most employees simply don’t have such amounts of cash to hand (otherwise they would surely have been original shareholders?) and its not feasible in today’s climate to borrow the money from a Bank. Also there can be no certainty, more than a year out, that a company sale will take place. Selling unquoted trading companies is fraught with difficulty and many such sales fail to come off even after heads of terms have been agreed.


For EMI schemes to be returned to their former glory the chancellor should go the extra mile and remove also the 12-month rule for shares obtained through the exercise of EMI options. Then members of management teams will be able to go back to agreeing to pay the market value of the shares on a minority basis at the date of grant but only paying that sum on exercise even if that is on the eve of a sale. Such an additional change will simply be restoring the position as it stood between 2000 and 2008, when Gordon Brown had such a benign tax climate for entrepreneurs.


Going back to the old benefits under EMI is not giving something for nothing to management teams. They only get any benefit out of an EMI scheme if they grow the value of the business. Without that growth in value, there will be no sale of the company from which the management team can benefit and no tax liabilities will be generated either. So it’s the growth in the value of the company which is crucial and the economy as a whole which benefits from this. But that


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growth in value is much more likely if the management team has been incentivised as before under original EMI schemes.


George Osborne should take this opportunity to go this extra mile and show that he can offer management teams a tax regime which is at least as beneficial as that provided by Gordon Brown.


Details: Cormac Marum cormacmarum@harwoodhutton.co.uk 01494-739500


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