The document discusses Enterprise Management Incentives (EMI), a UK tax scheme that provides favorable tax treatment for share options granted to employees of qualifying small companies. Some key points covered include that EMI has existed for 15 years and is popular due to its flexible rules and generous limits. However, the document also notes some potential pitfalls and problems with EMI, such as difficulties using it for certain types of companies like family businesses or those backed by private equity. It concludes by questioning whether EMI will need to prove it creates real growth to maintain support from UK tax authorities going forward.

1. Enterprise Management Incentives
Opportunities and Pitfalls
William Franklin
Partner
www.pettfranklin.com
Share Scheme Specialists
Thursday 23 April 2015

2. Enterprise Management Incentives
• Very popular
• Existed for 15 years
• Cross party political support
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3. • Growth taxed at 10%
• No tax on grant or exercise of option
• CT relief on growth in value at 20%
• Negative tax rate of 10%
• Flexible rules - performance conditions
- Discretionary or all employee
- Lapse if leave
• Generous limits
Why is EMI popular? ……
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4. Why is EMI popular (cont’d) …
• Applies to most companies - 250 employees
- £30 million gross assets
- can be quoted
- qualifying companies
• Documentation - DIY?
• Pre-grant valuation agreement with HMRC
• Register not approval
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5. Any pitfalls or problems?
• Options not full ownership
• No voting rights
• No dividends
• How does employee get a benefit unless there is a sale?
• Do they encourage short termism?
• Difficult to use in family or Mittlestand type companies
• Difficult to use private equity based companies
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6. 10 year limit
• EU, does it give UK an unfair advantage?
• No but 10 year limit and reviews
• 10 year for tax, option does not have to lapse – drafting point
• Pressure for exit event in that timescale
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7. • Not controlled by a corporate
• Not a subsidiary – popularity of ESS
• Private equity backed difficult
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Independence Test

8. • Non-qualifying trade if IP acquired
• Software companies
• Clearance
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Royalty Trap
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9. Disqualifying events
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• Restriction of tax relief
• Employees properly warned?
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10. Articles
• Used to have to file them with HMRC (a discipline)
• Do they exist, up to date and fit for purpose?
• Can they cope with employee shareholders?
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11. Exit only options
• Very popular
• What is an exit?
– Partial exit
– Private equity investor acquiring some of the shares
– Acquire a controlling shareholder
– Impossible to anticipate every situation
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12. Valuation
• Problem on exit if not agreed within 92 days
• Risk based approach of HMRC
• Can you rely on valuation beyond EMI?
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13. Filing
• 92 days
• Used to be paper
• Few reasonable excuses accepted, if late
• Now electronic
• Harder for agent to do
• How many lose EMI benefits by default?
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14. Share Buyback
• Potentially taxed as Income
• Advantage for ESS
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15. Loss of ER Relief
• Loss of trading status
eg. Switch to investment company status
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16. Gross Assets
• Aggregation not a consolidation
• Company purchase: Fair value IP/goodwill not
in gross assets
• Hive up at fair value trap and IP/goodwill is
included in gross assets
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17. The Long View
• Registration only a risk
• 15 years longer recession than the Great
Depression
• Growth now – but little loss of tax to HMRC yet
• Introduced in a climate of strong tax revenue
• Now in an era of structural deficits
• Will EMIs have to ‘prove’ they really create
growth to survive and avoid challenge
• EMI hit before with CGT rate changes in 2008 and
2010, until extension of ER relief
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18. Questions?
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19. Contact details
David Pett david.pett@pettfranklin.com mobile: 07836 657 658
William Franklin william.franklin@pettfranklin.com mobile: 07889 726767
Stephen Woodhouse stephen.woodhouse@pettfranklin.com mobile: 07836 756031
Office: 0121 348 7878
Twitter: www.twitter.com/pettfranklinLLP
For lots of information, go to our website:
www.pettfranklin.com
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