One way to boost UK productivity & HMRC can help

Posted by rachel.doex at 16:48 on 26 Jul 2019

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A company with a strong business idea and management wants to upscale its operations and seeks institutional investors to do so. Not uncommon and nor is the fact that there may well need to be a number of rounds of investment and a lot of graft put in by the company’s management and employees before the company hits its goals (whatever they might be).

Such a company may well fall within the financial and size limits required to have an EMI plan (which as we all know) is the pre-eminent or go to UK tax-advantaged share option plan.

However, the fund raisings may have two important implications for such a budding and energetic company.

Firstly, it is likely to suffer the cost implication of advisers having to delve into the shareholdings of the private equity investors.

Secondly, and more importantly we at RM2 have come across situations where a company on the face of it would be an ideal candidate for Enterprise Management Incentive share scheme ("EMI") and for which an EMI plan would be a great vehicle for aligning interests and boosting productivity. However, following a tricky and time-consuming investigation noted above, it turns out that the company in fact fails to satisfy the “independence” test set out in para 9 of Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) due to the make-up and/or form or the private equity investment.

This strikes RM2 as being a bit of an “own goal” for UK PLC. Naturally the “independence” rules regarding EMIs have a place to counter tax avoidance but surely they can be tweaked to ensure appropriate candidate companies backed by private equity/venture capital can have an EMI plan and take advantage of considerable positives that this share option plan can bring.

Come on HMRC – you know it makes sense!

If you would like to know more about an EMI scheme for your organisation please call us on 0208 949 5522 or email enquiries.co.uk and we would be pleased to have an initial conversation with you.