The employee tax break so good it may need registering as a UK government subsidy

04 June 2024

A recent article 'Working from holiday' highlighted how businesses are responding to staffing challenges by allowing staff to work remotely outside of the UK, leaving themselves vulnerable to significant corporate tax and legal implications. 

As employers continue to focus on recruiting and retaining key staff in their workforce, they may want to consider enterprise management incentive (EMI) options as a tax-efficient route to provide an employee reward. EMI is a government-backed share option scheme that typically works by giving employees the opportunity to buy shares in their employer or group at their current price, but with the flexibility to defer the cost until later. A later sale of those shares can give employees the opportunity to share in any resulting sale profits, like other shareholders, potentially with a reduced capital gains tax rate as low as 10%, rather than higher income tax rates. 

Although employment related, the potential tax advantages include:

  1. paying capital gains tax (CGT), not income tax, on any gain;
  2. providing the opportunity to benefit from business asset disposal relief (BADR) for CGT regardless of the holding size, which allows for a 10% tax rate on any gain up to a £1m lifetime limit for an individual;
  3. having no National Insurance contributions (NICs) or PAYE obligations for the employer; and
  4. the employer getting corporation tax relief when the option is exercised.

The conditions to get and retain these tax advantages are well publicised. It’s also widely recognised that there are reporting requirements, and the annual returns are due by 6 July each year, so it is the season for getting these returns submitted online.

However, what isn’t so well understood is that the EMI scheme is so good that the UK government is required to report details via the UK Subsidy Control Regime. The main purpose of the regime, embodied in the Subsidy Control Act 2022, is to meet the UK international obligations with the World Trade Organisation and others, aimed at regulating subsidies given by the UK government, including through tax benefits.

The beneficial reliefs obtained from qualifying EMI options need to be logged by the government in its ‘Subsidy Database’, against the name of the relevant company, if that benefit exceeds £100,000.

As a result, where the use of EMI options leads to the total tax benefits exceeding £100,000, the employing company will be named in the Subsidy Database, something which not many people are familiar with.

Featuring on a government database isn’t usually a cause for celebration, but being noted for providing staff with benefits so large they need to be publicly disclosed to ensure the government meets its international obligations might prove to be the exception.