A leg-up for SMEs: changes to Enterprise Management Incentives

The war for talent is often a battle that SMEs end up on the losing side of. Many are left struggling to recruit and retain the talent needed to grow their businesses. The Enterprise Management Incentives (‘EMI’) scheme helps to address this issue by providing SMEs with a tax-advantageous employee share scheme.

Why use EMI?

EMI enables SMEs to offer remuneration packages that are competitive with larger firms. This benefits SMEs by helping them to recruit and retain skilled employees. Given the generous income tax and capital gains tax advantages offered by EMI shares, SMEs are better able to compensate their employees for the risk that comes with working for a smaller, younger company.

EMI schemes allow employees to acquire options over the shares of their employer. This gives them the right to purchase the shares outright at a later date. It offers an incentive to employees to be invested in the long-term growth of the company, while allowing the current owners to maintain control of the company at the time of issue.

How has the process of granting EMI options changed?

The scheme was subject to some minor changes over the summer, as enacted by the Finance (No.2) Act 2023. The changes apply to all options granted on or after 6 April 2023, as well as those granted before this date but not yet exercised.

The changes enacted are:

  1. The removal of the requirement for the company to set out details in the EMI option agreement of any restrictions attaching to the shares that can be acquired; and,
  2. The removal of the requirement for an employee who is acquiring EMI options to sign a working time declaration.

(However, it should be noted that this amendment does not remove the working time requirement itself, it only removes the requirement for a declaration to be signed.)

Additionally, from 6 April 2024, the deadline for notifying an EMI option will increase from 92 days following the date of grant, to 6 July, following the end of the relevant tax year. This brings the EMI notification process in line with Employment Related Securities (“ERS”) annual reporting.

Impact of changes

While these are not major changes to the EMI scheme rules, they should make an impact in lessening the administrative burden on SMEs when granting EMI options to their employees. According to HMRC, these changes will impact 4,700 SMEs, with reduced spending on EMI administration thought to result in approximately £3m in savings.

These small changes are not likely to have an explosive impact on the grant of EMI options, but they should make it easier for SMEs to grant EMI options without accidently tripping over some of the legislative requirements.

If you have a query about Enterprise Management Incentives, contact our specialist Entrepreneurial Tax Team for a chat.

Author – Christie Hutton, Entrepreneurial Tax Senior Associate