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UK secures long-term European backing for key small business tax break


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Issued 20 August 2009

The Government has secured the long-term future of a tax break designed to help small, high-growth companies to recruit and retain highly skilled employees by gaining State Aid approval from the European Commission. 

The Government convinced the European Commission that the Enterprise Management Incentives (EMI), which provide a tax break on share options offered by small and medium sized companies to their employees, play a crucial role in enabling small firms to recruit and retain the highly skilled employees they need to thrive.

The Government is also widening the eligibility criteria so that companies  based in the UK which carry out considerable overseas activity can use EMI to recruit key UK-based staff.

The certainty provided by the granting of European Commission approval – which lasts until 2018 – together with the new eligibility criteria will provide a boost to the 9,000 companies that currently offer share options to their employees under EMI, and is likely to encourage take-up amongst the high growth small firms that will play a vital role in the return to growth in the UK economy.

The Economic Secretary to the Treasury, Ian Pearson, said:

“This is excellent news for small and medium-sized companies, particularly at a time when their success will be crucial to economic recovery.  Long-term State Aid approval of EMI provides certainty over the future of the scheme, whilst the relaxation of eligibility requirements will help SMEs with substantial international activities to recruit highly-skilled UK-based staff.  We are confident that EMI will continue to act as a valuable tool in ensuring the growth of SMEs in the UK.”


1. Enterprise Management Incentives enable small and medium sized companies to offer their employees options over shares worth up to £120,000.  Employees are able to buy shares in the company at a pre-agreed price.  If the value of the shares increases, employees are able to purchase them at the lower pre-agreed price.  Under standard tax treatment, the employee pays income tax and national insurance contributions on the gain, whilst the employer is subject to national insurance contributions.  Under EMI, both employees and employers are exempt from this tax liability.

2. In 2007/08, the latest year for which data is available, 2,830 companies issued share options under EMI to 26,400 employees.  The initial value of the shares over which share options were granted was £300m.  The total number of companies operating EMI was 9,110.  The tax relief granted in 2007/08 under EMI amounted to £240m.

3. The Government has been engaged in negotiations with the European Commission to meet its legal obligation to demonstrate that the rules governing EMI comply with the appropriate guidelines and treaties regarding the provision of State Aid.  The Commission has now agreed to grant EMI State Aid approval until April 2018.

4. A single change to EMI will be introduced.  The current rules require a qualifying company’s activities to be "wholly or mainly" in the UK.  This will be relaxed so that a company is only required to have a “permanent establishment” in the UK.  This will help UK SMEs with substantial overseas activities to recruit highly skilled UK-based staff.  It will also allow UK tax-paying staff of overseas SMEs that have a permanent establishment in the UK to benefit from EMI.  Employees of overseas SMEs who are not subject to UK tax will not be able to benefit from the tax relief offered by EMI. 

5. The change will be legislated in Finance Bill 2010 and is anticipated to take effect from 6 April 2010.

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Article Published/Sorted/Amended on Scopulus 2009-08-23 17:28:30 in Tax Articles

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