EMI scheme rules: can they be improved to encourage more business growth?

The successes and challenges of employee share schemes in the UK, particularly in fast-growing companies, has been under the spotlight, with the recent news of Revolut’s $500 million secondary share sale that allowed employees to unlock their capital.

But are the current EMI scheme rules truly working as well as they might? The UK EMI scheme has been in place for approaching 25 years and whilst it was ground-breaking compared to initiatives in other countries when it was introduced and has been very successful, now might be a good time for the government to review how well it’s working. We believe that with some changes, EMI schemes could lead to even more successful businesses and productive and rewarded employees in the long run.

Increasing EMI employee limits

One of the topics being discussed is potentially increasing the EMI employee limit from 250 employees to 500 or 1,000 to allow larger scale-ups to offer EMI options and attract experienced talent.

Samantha Lenox, Head of our Employee Share Schemes team, comments:

Whilst we support the increase of the employee limit for EMI eligibility, it’s important to remember that EMI schemes are fundamentally a risk/reward mechanism. Employees in start-ups may be more at risk of job loss and often receive less cash pay than in a mature business, and tax-relieved options are designed to compensate for that. Given its widespread use, it's vital to protect the tax relief associated with the scheme, ensuring it remains targeted at businesses that fit its intended profile. It’s also worth noting that France’s BSPCE operates without an employee limit.

Extending the lifespan of an EMI option

The merits of extending the lifespan from 10 to 15 years to align with the average time it takes for a company to IPO have also been debated.

We see exits extending beyond 10 years. However, we have some hesitation about extending the life of EMI options beyond 10 years, mostly because employees don’t stay with the same company for that long, and as businesses grow, their needs and required skillsets change. It seems more practical to issue new options to continuing employees rather than prolonging the life of older ones, particularly given HMRC allow generous discounts to round prices for EMI options which reduces the pain of valuation and option price increases.

Areas to consider

Technical issues with older schemes

Changes in HMRC’s practice can cause operational challenges for companies providing EMI options on an ongoing basis.

In April 2023, the tax rules changed on the requirement to provide details regarding restrictions on shares subject to EMI options. This change simplified the technical position which is welcome.  

However, HMRC’s current guidance on the use of discretion in relation to exercise events in older schemes can present difficulties as it removes some of the previous flexibility in relation to exercise rights. For businesses, this creates uncertainty and can throw up unexpected costs or loss of expected tax reliefs which is undesirable.

Corporate controlled business are unable to offer EMI options

The exclusion of corporate-controlled businesses from offering EMI is another area that deserves reconsideration.

Currently, businesses aren’t eligible to offer an EMI options scheme if they hire more than 249 employees, have assets over £30m or they become majority owned or controlled by another company.

Why shouldn’t corporate-controlled businesses be allowed to offer EMI schemes? For example, just because a company is backed by private equity doesn’t guarantee its success. Private equity backed businesses can still face significant risks, and offering EMI options could provide valuable incentives to employees, just like in other companies. As private equity investors generally seek an exit within 3-5 years of investment, allowing employees to participate in these sale events where they have contributed to value creation, could provide meaningful financial rewards to employees in companies where there is a real prospect that awards can be monetised.

Reduce legislative complexity

More generally, the EMI scheme can be very complex to correctly operate over a period of time due to the number of rules to satisfy. This means that frequently problems arise at an exit event which cause delay and potential loss of the valuable tax benefits. Reviewing the workings of the scheme to see whether it can be further simplified to make it more effective (following simplification changes which were adopted recently), particularly given longer exit horizons and value creation events, would be very welcome.

Why employee equity is crucial for the future of UK start-ups

While the current scheme has been instrumental in driving early-stage growth, the debate now centres on how to adapt the scheme to support companies as they scale. Any reforms made must carefully balance the needs of both startups and their employees to ensure long-term success without losing the advantages that have made the EMI scheme so popular.

If you're considering implementing a share option plan for your business and need legal support, contact our expert team of EMI solicitors via 0800 689 1800, or by completing the enquiry form below.

If you’d like to find out more about how employee share schemes can benefit both your employees and your business, our free on-demand webinar delves into the various types of employee share schemes and the numerous benefits available to businesses and employees.