ENGLAND & WALES Trends and Developments Contributed by: James Ross, Claire Matthews, Karen Bail and Marianna Vlas, Winston Taylor
to UK-resident direct investors – though the reduction in the rate of tax relief for VCT investment may have the counteracting effect of reducing investment. The expansion of EIS eligibility is a welcome statement of intent from the government. Attracting external capital into early-stage companies is, however, only part of the challenge. Equally important is the ability of those same companies to build and retain the talented teams needed to deploy that capital effectively – and it is here that the Enterprise Management Incentive (EMI) scheme plays a central and complementary role. The EMI Scheme: Background and Purpose The EMI scheme was introduced in 2000 as a targeted measure to help smaller, higher-risk trading compa - nies compete for talent against larger, more estab - lished employers in a context where cash compensa - tion was often not a realistic option. The government’s intention was to provide a straightforward, tax-effi - cient mechanism through which early-stage compa - nies could offer equity participation to key employees without the tax charges that would ordinarily arise on the grant or exercise of share options. In that respect, EMI was a deliberate complement to the EIS – where EIS was designed to attract external capital into early- stage companies, EMI was designed to help those same companies build and retain the teams needed to deploy that capital effectively. How the scheme works The basic architecture of the scheme has remained broadly stable since its introduction. Qualifying com - panies may grant options over shares worth up to GBP250,000 per employee by reference to the market value at the date of grant, without triggering an income tax or national insurance contribution charge at that point. Where options are granted at or above market value, no income tax charge arises on exercise either, so that the employee’s liability is confined to capital gains tax on an eventual disposal – historically at the preferential 10% rate available under Business Asset Disposal Relief, though that rate has now increased to 18% as discussed below. The result, notwithstanding that increase, remains a highly attractive tax profile by comparison with unapproved options, under which both the discount at grant and the gain on exercise
are subject to income tax and national insurance con - tributions. Notably, the regime also permits options to be granted at an exercise price set below the market value of the shares at the date of grant – a flexibility that can prove particularly useful where a company wishes to maintain a uniform exercise price across its option pool, for instance following a funding round that has pushed share values higher. Granting at a discount does not in and of itself taint the tax-favoured status of the option. Income tax and, potentially, both employer and employee national insurance contributions will be payable on the discount element at the point of exer - cise, but depending on the circumstances, the overall economic cost of that treatment may prove less bur - densome than requiring employees to fund the higher exercise price. A period of policy neglect and uncertainty For much of its history, however, the EMI regime suf - fered from a degree of policy neglect. The individ - ual limit of GBP250,000, the company-wide limit of GBP3 million in outstanding options and the quali - fying employee headcount threshold of 250 full-time equivalent employees had all remained unchanged for many years, eroding in real terms as company valuations, team sizes and employee expectations increased. The cumulative effect was a scheme that, while still providing genuine value, was increasingly misaligned with the realities of the modern growth company talent market. The most significant development prior to the current Budget was the government’s confirmation, following the 2022 Budget, of the scheme’s continued availabil - ity after a period of uncertainty arising from the loss of EU state aid approval at the time of Brexit. That uncertainty had cast a temporary shadow over the scheme and created unwelcome instability for com - panies and advisers seeking to structure long-term incentive arrangements. The restoration of certainty was consequently a significant moment for the mar - ket, re-establishing EMI as a reliable long-term plan - ning tool for growth companies and their advisers. Around the same time, changes introduced to the Company Share Option Plan (CSOP) – a less gener -
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