Calling all Spin-Outs: Academics to qualify for EMI options!
Posted on July 09, 2012
Further to the Budget 2012 announcements a consultation document was published by HMRC on 27th June proposing to extend access to the Enterprise Management Incentives (EMI) scheme for academic employees of qualifying companies. This is great news for small or medium sized businesses and start-ups entitled to implement an EMI especially in the technology sectors where the business has spun out of an incubation hub.
What is an academic employee?
An 'academic employee' can be identified as a person working in an academic capacity at a university or educational or research institution. A Research Institution has been defined as any other institution receiving public funding, any institution that effectuates research activities other than for profit and is neither governed nor exclusively funded by an individual who executes undertakings for financial gain.
Why is this being looked into?
The Government's intention is to accurately target academic employees involved in work developing products and ideas for a qualifying business. Often academic research produces discoveries which are then worked through testing to proof of concept and then commercialised for release to market, often with support from business incubator hubs. Academics involved in research and development activity can play an important part in product innovation, generation, and development for such spin-out companies and are often retained an on-going, but typically part-time, basis.
These academic individuals do not usually satisfy the EMI qualifying working time criteria i.e. 25 hours a week or, if less, 75% of their working time.
The consultation, which concludes on 18th September, seeks comments on the proposed relaxation of working time prerequisites for academic employees in order to allow EMI options to be granted to academics who meet the following conditions:
1. The academic is an employee of the business, or an eligible subsidiary, whose shares are subject to the EMI option, but also works in an academic capacity for a Research Institution;
2. The academic employee's average hours working for the EMI company AND working in their academic capacity totals 25 hours per week (The purpose of the consultation is to link time commitments, with a specified number of average hours per week to be spent on the business of the EMI grantor).
3. The academic employee's work for the EMI grantor is at least related to their current institutional academic discipline.
4. The academic was employed by the EMI grantor to work on activities which can be defined as research and development (in accordance with section 1138 Corporation Tax Act 2010) OR
4. The academic was employed by the EMI allocating business in association with research relevant to that business's intellectual property. Intellectual property has been defined in section 456 ITEPA 2003.
The economic impact of these changes is relatively minor as the benefits will be confined to small or medium sized businesses and start-ups that have academic employees. It is however hoped that such measures will encourage further innovation.
This change is a move we welcome. A lot of university spin-outs have an academic employee and while other employees can be effectively incentivised through EMI any equity options for the academic would currently be unapproved share options; which means income tax treatment rather than the more favourable capital gains tax treatment under EMI. A comparison of the tax treatment of EMI versus unapproved share options is set out here. Please also see our article - 'Start-Ups: Using equity to build teams' for details of how the timing of any Intellectual Property transfer can impact Spin-Out company share valuation and taxation.
For more information on this topic, or any other share scheme advice, contact us directly on 020 8949 5522. Alternatively, our Associate Director Liz Hunter can be reached by email at Liz.Hunter@rm2.co.uk.