Government sympathetic over venture capital incentives

Economic secretary Melanie Johnson said no practical solution had been found to prevent avoidance where a single investor or investment company is owned more than half of the business.

She said the rules for EMI – allowing up to 15 key executives to be given options to purchase up to £100,000 in shares – are designed ‘to provide tax-advantaged share incentives to help small, independent, higher risk trading companies attract and retain key personnel’.

Johnson said the government understood the concerns because companies controlled by venture capitalists will not qualify for EMI as the business that wants to offer options to employees is not independent.

She said they had been considered during consultations, but ‘it would be difficult to provide a test that identified venture capital backing as opposed to any other kind of financial backing’.

It would also be difficult to distinguish which venture capitalists should be allowed to control companies offering EMI without introducing complexity and avoidance opportunities.

She said there would be no problem where several different venture capital funds owned more than 50% on aggregate, provided that no single fund was in that position.

The hint was the only sign of possible government movement during Finance Bill Committee debates in the face of a series of Tory attempts to widen the scope of EMI.

The Tory offensive, led by shadow finance minister Howard Flight, got nowhere. Flight argued for an amendment which would have allowed subsidiaries to offer EMI incentives providing the parent company auditors were willing to verify they were independent, which he claimed ‘gives a valuable third party control that the Revenue can rely on’.

It was defeated by 13 votes to eight. Flight did, however, make it clear the Conservatives back the basic scheme.