Enterprise Management Incentives (EMI): Confluence Tax response 2021

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The Chancellor of the Exchequer
HM Treasury
1 Horse Guards Road
London SW1A 2HQ

May 24, 2021

Dear Chancellor,

Enterprise Management Incentives: call for evidence

Thank you for the opportunity to respond to the above call for evidence. Our comments follow.

1. – 5. Respondent’s details
Confluence Tax is an 11-year established tax advisory firm; the only such firm to provide advice to businesses and individuals specifically within the IP-rich technology and biotechnology industries. Our expert team understands the industries’ complexities and trends and how they relate to the UK tax system as well as the international ramifications.

Confluence Tax has established excellent relationships with Government bodies, including HMRC and HM Treasury, as well as industry-specific organisations such as the BIA, enabling liaison with decision makers, and we have been involved in the many consultations and proposals affecting the life sciences sector. Confluence Tax is regularly requested to provide input to proposed tax changes, such as the 10-year review of R&D tax credits, PAYE cap, the OECD-driven reform of the Patent Box and potential changes to capital gains tax and venture capital schemes. 

The firm recently conducted a survey into how IP-rich companies deploy employee equity schemes within the tech and biotech sectors. Read the results of our Biotech Employee Equity Survey here.

6.  Does EMI help recruit employees?
The EMI scheme fulfils its objectives as a share option scheme; that is, it aligns employees with the objectives of the company and its shareholders. Companies in the tech and biotech sectors are built to grow and transact and we are not aware of a better mechanism. Crucially, the source of funding for the reward to employees comes from outside of the company; so from a sale of shares, which allows cash to be conserved for company growth.

7.  Does EMI help retain employees?
As per the survey results (see above link), most schemes use three to four-year vesting to reward those who stay with the company longer term. The flexibility to use shorter vesting periods, however, is welcome – for example, for those staff who switch from full-time to part-time working and are able to exercise when they cease to work full time.

8.  Does EMI help SMEs grow and develop?
The EMI code provides limits particular to an employee or the company as a whole, which are not usually problematic given the low value of the shares under option. Therefore, as companies raise more funds, they can grant more options to new and existing employees and maintain their option pool.

9.  Most valuable aspect of EMI for recruitment/retention?
The EMI scheme provides a fair and tax-efficient solution (capital gains tax treatment for the employees’ efforts in helping to achieve capital growth in the share price) without being prescriptive on the option terms. This allows employee, company and shareholder objectives to be aligned within each company, rather than dictated by tax treatment.

10.  Are companies over the threshold struggling with recruitment/retention?
The common issue our client base reportedly suffers from arises when significant fundraising (more than £30m) causes EMI to no longer be applicable. Companies are then best advised to award shares, rather than options, to employees, to secure capital gains tax treatment. The ordinary shares awarded typically have very low value for UK tax purposes, so no income tax charge arises at award.

This typically leaves companies with a number of issues, including the following:

•          Low UK tax values compared with, for example, US tax valuations, based on a completely different valuation approach; and

•          no facility to agree the valuation with HMRC, leading to uncertainty for these companies.

11. Would expanding EMI help with the above?
Expanding the qualification limit beyond £30m would help these innovative companies. Many of our clients are pre-revenue, but raise significant capital, as they need it to grow. A more subtle test, taking into account employee numbers and revenues, would identify companies that are still small and high risk, despite having gross assets in excess of £30m.

As noted in our response to point 6 above, EMI remains the best approach to offering employee incentives, where the conditions are met.

12. & 13.  Do you use other employee share schemes?
SAYE and SIP do not allow alignment of employee, company and shareholder objectives for a high-growth/early-stage company.

CSOP schemes are used occasionally, but the three-year holding period to secure capital gains tax treatment is problematic due to its rigidity. If there is confidence that the share value is low (see response to point 10 above) then an award of shares is the usual alternative to EMI, rather than using a CSOP scheme.

14. Suggested improvements to above schemes?
More flexibility could be introduced to the three-year holding period for CSOP.

15.  How does the UK employee scheme offering compare with other countries?
Many employees are remarkably flexible in their choice of work location. In particular, the advantages of the UK’s EMI scheme and the ability to agree sensible low share values is one of the key counters to the draw of the US.

16. Should the EMI scheme be expanded?
See our response in point 11 above.

17.  Do companies restrict growth to stay in the scheme?
No. Employees hold options over a minority of the share capital. Conversely, investors and management will do what is required to grow the company. We have never seen an attempt to stay within EMI criteria by distorting a company’s growth and any manager who suggested such a policy would be viewed very unfavourably by external investors and would probably not keep their job.

18.  If scheme expanded would smaller companies suffer?
No. The comparison is best made between very large established corporate groups (offering high salary, pension, company car, other benefits) versus much smaller early stage, high growth, R&D focused companies. The ability to offer a tax-efficient EMI share option scheme is a recruitment advantage for smaller companies.

A widening of the criteria to include slightly larger companies will never bring the very large corporate groups within the remit of EMI.

Yours sincerely, 

Colin Hailey


You can read the Government’s EMI call for evidence document here

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The tax advisors to biotechnology and technology companies