Finance Bill 2013 – Proposed improvements to Enterprise Management Incentives

12th December 2012

This newsletter looks at the proposed improvements to Enterprise Management Incentives published by the Government this week and at other announcements relating to employee share incentives.

The key improvements to EMI are as follows.

  • The Government announced in Budget 2012 its intention to allow shares acquired under an EMI plan to qualify for Entrepreneurs’ Relief (ER) on a disposal by an employee. Representations were made to the Government that the previous concession, which allowed ER for shares owned for one year prior to disposal was of limited use to EMI participants because EMI options are often exercised immediately before a sale of the employing company, so that they are not owned by the employee for more than one year.

Finance Bill 2013 proposes that ER should be extended to a disposal by an employee on or after 6 April 2013 of qualifying shares if

  • they were acquired on or after 6 April 2012 on the exercise of an EMI option, and
  • the EMI option had been granted at least one year before the disposal, and
  • the employee was in qualifying employment throughout the year ending with the disposal.

Allowing the one year period to start with the grant of options is very favourable to participants and, in our view, will make EMI plans significantly more attractive than they already are.

  • At present, EMI options exercised within 40 days following a “disqualifying event”, such as the participant leaving employment, will still preserve favourable tax treatment. Finance Bill 2013 proposes that the 40 day period should be extended to a 90 day period with effect from Royal Assent.
  • The Government has also announced that, with immediate effect, HMRC will update its guidance to clarify that there is no requirement for an employer to attach a copy of the articles of association of the employing company to EMI options.

There is also, however, some less welcome news on EMI.  In Budget 2012 the Government announced a consultation on extending EMI to academics employed by trading companies on a part-time basis. A summary of the responses to the consultation have now been published  which indicates that academics generally remain employed by their research institution, even whilst working on a spin-out idea, and that the bulk of their work is often done prior to a company being spun out. In the light of this, HMRC has confirmed that it will not proceed with the proposals.
The responses to the consultation have, however, identified some issues concerning the tax rules for research institution spin-out companies and HMRC has announced that it will be reviewing these rules before the 2013 Budget.

The Government has also published draft clauses to be included in Finance Bill 2013 to modify tax-advantaged share schemes. These derive from the recommendations of the Office of Tax Simplification and include the following changes:

  • Harmonise the provisions on retirement and other good leaver departures, including an extension of tax advantages to options exercised following some changes in control.
  • Allow the use of restricted shares for SAYE, SIP and CSOP. This will, in our view, make the SIP, in particular, simpler to establish and more attractive for private companies.
  • Delete the material interest rules for SAYE schemes and SIPs and increase the material interest threshold for CSOP to 30%.

HMRC has also published its response to the June 2012 consultation on tax-advantaged share schemes. It is evident that the current system of pre-approval of CSOPs, SAYE and SIPs schemes will be replaced with a self-certification system similar to that for EMI in 2014.

Finally, a draft clause has been published for inclusion in Finance Bill 2013 setting out the CGT exemption for shares acquired by an employee in exchange for adopting the proposed “employee shareholder” status, which confers reduced employment rights. The draft legislation includes anti-avoidance provisions to:

  • Disallow CGT relief if, on acquisition of the shares, the employee shareholder (and certain connected persons) can exercise 25% or more of the voting rights in the employer or a parent undertaking, or if the employee shareholder had such a material interest in the year before acquisition.
  • Include within the £50,000 limit employee shareholder shares acquired from certain companies previously associated with the current employer.

We anticipate that the CGT exemption will apply to shares acquired on or after 6 April 2013.

Details of all these proposals can be found by clicking on the following link: http://www.hmrc.gov.uk