EMI Qualifying Requirements in a ‘Post-Brexit World’
It is noticeable that, while almost all the tax-advantaged share plans (CSOP, SIP and SAYE) and “Employee Ownership Trust” (EOT) arrangements make reference to “trading activities” (in the context of the scope of appropriate activities of a relevant company), it is only the Enterprise Management Incentives (EMI) qualifying requirements where there are significant curbs on the types of “trading activities” that will qualify. In fact, the list of “excluded activities” for EMI purposes is lengthy and significant in scope.
So why don’t all the other tax-advantaged employee share plans and EOTs have exclusions for certain “trading activities” whereas EMI does? The reasons for this difference appear to RM2 to be two-fold.
Firstly, the scope on “trading activities” for EMI has been altered due to EU rules on state-aid, which have a major impact on EMI and the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) legislation.
However, with the United Kingdom due to exit the European Union in the near future, the writer wonders how Brexit might impact on the curbs on the types of trading requirements that might qualify going forward.
Secondly, the curbs supposedly reflect the spirit of the EMI legislation which is to provide a tax-advantaged method for small, fast-growing independent companies to recruit and retain employees and (our understanding has always been) companies that, given their size and stage in the business life cycle, are carrying an element of risk.
That said, it is not clear to RM2 how a small accountancy/tax advisory or even legal advisory company (assuming the required corporate structure is in place) could be considered to be so objectionable to HM Revenue & Customs in this regard, such that it is considered to be carrying out “excluded activities” – as opposed to, say, a large bank or insurance company or a property developer where the justification or rationale is more obvious.
On other hand, while we contemplate the spirit of the EMI legislation mentioned above, it is also perhaps difficult to reconcile the enormous increase in the limit on the monetary value that an employee can receive (from £100,000 originally to £120,000 in 2008) to £250,000 currently. EMI is after all supposed to be aimed at small, fast-growing companies. As has been noted previously, the differential between this limit and the CSOP limit (£30,000) seems particularly difficult to stomach, especially if a company merely fails to qualify by reason of trading activities that are acceptable for any tax advantaged scheme other than EMI.
Hopefully HM Revenue & Customs will be able to review the EMI qualifying requirements (amongst other things) as part of the Brexit process and make appropriate changes to the employee share plan landscape for the “brave new world”.