The UK Enterprise Management Incentive (EMI) scheme is intended to enable SMEs to attract and retain skilled workers by allowing them to offer remuneration in tax-privileged share options. This popular scheme has, however, been the subject of some uncertainty on account of its late renewal under EU state aid rules and confusion surrounding its legality post-Brexit.
EMI Scheme In Brief
Under the scheme, employees of SMEs benefit from reductions from UK income tax and/or national insurance contributions (NICs) when exercising their share options. Furthermore, companies may also benefit from an exemption from employer NICs. However, employees may be liable for capital gains tax when shares are sold.
Generally, SMEs with assets not exceeding £30m and employing fewer than 250 employees can offer the incentive to key personnel, with firms able to grant share options up to a value of £250,000 per employee in a three-year period.
Companies in five “excluded activities” cannot offer the EMI: banking, farming, property development, legal services, and shipbuilding.
Where Does The EU Come In?
All EU member states must abide by state aid rules. These are intended to prevent governments from distorting competition in the Single Market by using public money to subsidise certain enterprises with tax breaks and other schemes, which would give them an unfair advantage in the marketplace. Therefore, member states’ tax incentives are subject to legal scrutiny by the European Commission before they can be introduced.
By the letter of EU law, the EMI is illegal state aid. However, the rules allow the Commission to make exceptions if the aid produces wider benefits. In this case, the EC considers the EMI scheme justified, as SMEs face barriers to growth not faced by their larger competitors and small firms are important engines of job growth.
The scheme was first approved by the Commission in 2009 on a temporary basis until 6 April 2018, and then again on 15 May 2018 until 6 April 2023.
Until recently, it was unclear if EMI options exercised between the scheme’s expiry (on 6 April) and reapproval (on 15 May) would qualify for the incentives as normal. Thankfully, on 31 May 2018, following much speculation, HM Revenue and Customs confirmed that this would be the case.
However, while one area of uncertainty has been clarified, another has emerged. In its reapproval notification, the Commission took the unexpected step of pointing out that its decision applies only until the UK ceases to be a member state. Questions are therefore being asked by affected companies about whether the scheme will continue beyond this date, and in particular during any Brexit transitional period, during which the UK would continue to be bound by EU law.
Doubts have been expressed about the application of EU state aid rules in the UK after Brexit, and by extension the legality of tax incentive schemes that have required EU approval.
The UK Government’s current position is that UK law after Brexit will continue to reflect EU state aid principles, and it is expected that the UK Competition and Markets Authority will become the state aid regulatory body.
This suggests that the EMI’s future looks reasonably assured. However, where Brexit is concerned, nothing is set in stone. The transition period terms are yet to be agreed, including on the future of schemes like the EMI, so EMI beneficiaries should continue to monitor this situation closely.