Despite the name, legislation regarding the Enterprise Management Incentive (“EMI”) scheme, is relatively lightweight; if you are a genuine SME there are few real pinch points for qualification. However, the main stumbling block for companies is often the qualifying trading activity requirement.
HMRC have set out a list of activities that are deemed to be excluded and undertaking any of these activities could lead to the company being disqualified for the purpose of EMI. A number of these activities are relatively straightforward and self-explanatory; take property development, farming, market gardening, and the provision of legal or accountancy services for example. Unfortunately, participation in any of these activities makes your company closer to winning an Emmy than an EMI.
For a full list of excluded activities, see HMRC’s guidance.
However, there are a few of these activities that exist in a somewhat grey area that companies need to be aware of before undertaking.
Receiving royalties and license fees
For many software companies, the receipt of royalties or license fees is the key revenue stream in their business model. Importantly, this does not encompass subscription fees being generated using a Software as a Service (“SaaS”) model.
So, if my business is generating income through the receipt of royalties and license fees, I’m disqualified, right? Not necessarily.
HMRC understand that this exclusion will negatively impact the genuine start-up companies that the scheme is designed to help. As such, they have implemented an important ‘carve out’ from this exclusion.
Where the receipt of royalties and license fees are generated from the exploitation of an intangible asset, for which the greater part has been created by the company continuing its trade, the company will not be disqualified from EMI. This bit of HMRC magic allows start-up companies to develop their product from scratch and to receive royalties and license fees from it, all while still qualifying for EMI. After all, don’t all unicorns need a running start?
Leasing
Another disqualified activity is leasing. Where a company generates its income from leasing its assets, regardless of whether they developed it from scratch or not, they will be disqualified from EMI.
However, what constitutes leasing is another grey area. The main indicator of leasing is that the customer is free to use the asset for the purpose for which it is intended. The example provided by HMRC revolves around what may be constituted as car hire: using the contrast between hiring a taxi, as opposed to say, a chauffeur. Here we must determine which can be described as a service and which can be considered a facility. In the eyes of HMRC, taxi hire can be viewed as the provision of a service and be qualifying for EMI, whereas chauffeured car hire is not.
When considering whether your company is generating income from leasing and, therefore, disqualified from EMI, it is vital to understand whether you are providing the asset to the customer for use by the customer, or if you are using your asset to provide a service to the customer.
Advance assurance
Fortunately, HMRC operate a non-statutory clearance service that allows companies to write to them and ask for assurance that they will qualify if eligibility is a concern. This allows you to gain HMRC’s opinion before you jump the gun and issue EMI options to employees like wanted posters for Billy the Kid.
Additionally, if your company is being purchased, advisors will often look for evidence that HMRC has provided Advance Assurance marking your company as EMI qualifying. This is normally part of their due diligence procedures and makes it important in order to quell potential purchaser’s fears.
Should you have any queries on EMI, please contact the team and we will be happy to offer our expertise.
Author: Ryan Lewis, CT: Entrepreneurial Tax
