Growing malaise in the all-employee share schemes sector is disguised by SMEs adopting options-based Enterprise Management Incentives (EMI), new HMRC statistics reveal.
While the overall number of companies operating tax-advantaged employee share schemes rose by six percent to 15,340 in the tax year ended April 2020, a record 13,970 of these were EMIs – i.e. 91 percent of all the companies using any Eso scheme – HMRC tables showed. EMI’s upward march, adding an additional 1,120 SME companies during the 2019-20 tax year, mean that its usage in the UK has doubled in a decade.
Although the number of key employees granted EMI options is still relatively small – 156,000 during the fiscal years 2015-20, including some double counting, there are signs that it is beginning to expand rapidly. However, as many EMIs are Exit-Only, not even half these employees is ever likely to be able to cash in their options, unless the young companies achieve a trade sale, an IPO or a takeover.
Meanwhile, the warning lights are flashing as company usage of the three other tax-advantaged share schemes – SAYE-Sharesave, the Share Incentive Plan (SIP) and the Company Share Option Plan (CSOP), declined by a further three percent overall last year, said HMRC.
In detail, the number of live CSOPs fell slightly, from 1310 to 1290; the number of SAYE-Sharesaves was down from 570 to 550 live schemes and finally the number of SIPs went down marginally – from 850 to 840 – its statistics revealed.
The totals for each tax-advantaged share scheme add up to more than 15,340 because many companies operate SAYE and SIP schemes – and sometimes CSOPs too – simultaneously. Similarly, it is misleading to add up employee users of each scheme as (a) some employees are members of two schemes and (b) many SIP participants buy their partnership shares monthly, rather than yearly.
Just a decade ago, there were still almost 2,000 CSOPs up and running, while the number of SAYE schemes slumped from about 700 over the same period. Only the SIP has held on relatively well, losing only five percent of its company usage.
Worse still, the number of UK companies using these three schemes has declined by 17 percent – almost one fifth – during the past decade, adds HMRC in a pointed warning.
Furthermore, these latest official Eso statistics only cover the period up to April 6 last year and therefore do not take account of recent adverse effects of the pandemic on either employee share scheme invitations or participation.
On top of all that, the tidal wave of private equity houses acquiring British quoted companies threatens the existence of numerous employee share schemes, which are unlikely to be replaced by their new owners.
In the light of HMRC’s revelations, the Esop Centre is urging the chancellor to give fusty all-employee share scheme rules a major shake-up to make employee participation much more attractive and relevant to changing employment and work patterns. Esop Centre founder Malcolm Hurlston CBE, said “The share scheme rules reflect the time of their inception far more than the needs and circumstances of today and tomorrow. It’s time for a leap forward, not for more tinkering merely to shore up the existing system.”
In the fiscal year ended April 2020, 99 percent of companies operating EMI did not operate any other tax advantaged scheme, according to HMRC.
Perhaps the most worrying new statistic was that the number of employees granted CSOP options in 2019-20 fell to just 25,000 compared to an already falling 40,000 a decade ago. Though many companies are registered to offer CSOP, few are actually using it anymore.
Similarly, the number of employees granted SAYE options in 2019-20 was down to 310,000 from more than 400,000 a decade ago.
Employees received an estimated £530m in Income Tax (IT) relief and £340m in NICs relief in the 2019-20 fiscal year from tax-advantaged employee share schemes (ESS), but the total cost to taxpayers was well under the level seen a few years ago.
The share options based Enterprise Management Incentive (EMI) was the largest beneficiary of IT + NICs tax relief – worth £360m in that year. However, there is an additional cost to taxpayers, especially in EMI’s case, because HMRC does not collect statistics on Capital Gains Tax exemptions and/or lower charge rate incentives when users cash in their options.