EMI – The Economic Rationale is Alive and Kicking

Recently the government issued without fanfare or flourish, an HM Revenue & Customs (“HMRC”) Economic Research report entitled “Evaluation of Enterprise Management Incentive scheme”. While I would suggest only economics nerds (of which there are a few at RM2) spend much time digesting it, it is worth mentioning a couple of points which arise as a result:

  • Three quarters of respondents agreed that the Enterprise Management Incentive Scheme (“EMI”) had been important to help drive their companies to grow and develop.
  • Employers saw retention as a key reason to introduce EMI, with recruitment secondary.
  • Some EMI adopters were able to scale up activities as a result of increased equity investment.

In summary, the report made it absolutely clear that the economic case for EMI was justified and that it was clearly providing considerable benefits to those EMI “adopters”.

In more detail:

 

The report (badged as HMRC but written by Ipsos Mori Social Research Institute) would likely have formed part of the UK’s submission to the EU in the context of the Enterprise Management Incentives regime and state aid approval.

It analyses in considerable detail (with econometric analysis alongside) the economic rationale as to why tax incentives should be granted to EMI share options. In a nutshell, this is to level the playing field where otherwise there is not inconsiderable market failure in relation to the ability of small fast-growing companies to attract the right employees to drive their businesses forward.

You can read the full report here: https://www.gov.uk/government/publications/enterpr… but we’ve noted in particular that:

  • the econometric analysis in the report did make it clear that some of those companies who had adopted EMI were more able to “scale up” their activities as a result of increased equity investment. This is important (in economic terms) because relatively larger companies (although still SMEs) have lower marginal rates of return to capital and are therefore closer to an optimal level of investment activity (which ultimately benefits production and the economy as a whole). Essentially, the thinking is that micro-businesses would earn more profits if they increase their deployment of capital, and therefore cannot be deploying a profit-maximising mixture of inputs.
  • According to employers, retention was more important than recruitment as a reason for introducing EMI. Although, in fact if one considers the economic arguments in isolation, the associated market failure (asymmetric information) is most prevalent for employees when they are considering whether to take employment with the relevant company rather than when they have been employees for a period.
  • Finally, accountants and tax advisers are still the main route for companies to first learn about EMI (as opposed to the press/media amongst other routes).

If you want to speak to us about the EMI or any other share schemes please contact us at enquiries@rm2.co.uk or call 0208 949 5522.