EMI: Shifting the balance

With the threat of global recession looming, reactionary bonus cuts and staffing reduction measures may be high on the agenda. Forward-thinking employers will nevertheless recognise that there are cost efficient ways to ensure they retain the core strategic individuals who can see the company through hard times and keep the business growing.

The uplift in the Balance Sheet gross asset limit (from £15m to £30m) for Enterprise Management Incentives, announced by the chancellor in his November pre-Budget report, is intended as a measure to sustain survival and build recovery for smaller businesses. The change however brings both pleasure and pain.

The Enterprise Management Incentives plan has not been short of good publicity and quite rightly so. The EMI plan was introduced in the Finance Act 2000 and has received universal acclaim for being the most tax efficient and flexible share option plan in existence.

According to the Revenue press release the amendment to the balance sheet assets limit, effective from 1 January 2002, will allow a further 6,000 companies to participate.

Should we applaud the chancellor?
Surely therefore we should be applauding chancellor Gordon Brown on his announcement to widen the qualification criteria such that more employers qualify for EMI? Perhaps, but one might also surmise that the creator of this desirable tax break has lost sight of the original purpose and is demonstrating that this Labour government sometimes bows to big business at the expense of the little guy.

The EMI Plan was initially aimed at giving employees an incentive to work for smaller, riskier companies by providing them with the opportunity to make money on their shareholdings if the businesses prospered. The plan was to provide entrepreneurial business with a competitive advantage when seeking to recruit and retain staff with skills that are much in demand in this culture of fluid employment.

The Americans are big on enterprise but the UK has been slow to embrace the entrepreneurial spirit. EMI was therefore introduced to position young growing UK businesses as employers of choice in the global economic market. The uplift in the gross assets balance sheet test would now seem to be a deliberate step away from the original EMI philosophy of creating an uneven playing field that would assist small companies to attract the calibre of staff needed to drive forward these high risk endeavours.

The lines are now blurred
The lines may now be slightly blurred as to why an individual would opt to work for a pioneering start-up business when an established company can offer the same tax breaks with greater security. Are we now at risk of dampening the entrepreneurial fire before it has fully caught hold?

The Revenue Press release states that this change is to benefit small business. ‘Small’ however is a relative term and it is open to conjecture whether a company with gross assets of £30 million is actually ‘small’. Instead of increasing the value of individual awards that can be made under EMI or introducing tax breaks for those employed by small unincorporated businesses Gordon Brown appears rather to have sought to allow established corporate beings to gazump the novice first time buyers. Entrepreneurial companies welcomed the EMI plan as a way of boosting employee reward without using vital cash reserves. Now these young organisations face an uphill struggle to remain attractive to recruits who might previously have been lured magpie-like to the potential pot of gold at the end of the EMI rainbow and been satisfied, but who now prefer the security of employment with a matured corporation offering similar equity rewards in addition to an attractive salary.

There is no doubting that EMI is a wonderful plan and the changes to the business asset taper relief regime also announced in the pre-budget speech only make this reward tool more powerful. The unparalleled benefit is an effective rate of tax for higher rate taxpayers of just 10% when shares acquired under an EMI plan are sold more than two years after the date of grant of the EMI option. The potential pain however, lies in the fact that the dice might now be loaded in favour of more established corporate entities to the detriment of seedling businesses.

Some might have hoped that EMI would remain the exclusive right of entrepreneurial businesses, who are after all those most in need of a helping hand and who are least likely to be in a position to undertake the more burdensome administration of the other Revenue approved option plans that larger corporate entities already have their disposal.

  • Elisabeth Low is a consultant with WJB Chiltern plc. She advises on all aspects of equity and incentive planning and can be contacted on 020 75714920, email: The views expressed are her own and are not necessarily those of WJB Chiltern plc.

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