Earlier this month, Innovate Finance CEO Charlotte Crosswell delivered an Open Letter to UK Prime Minister Boris Johnson demanding the Enterprise Management Incentive (EMI) be updated to a cap of £100 million from the current £30 million. Simultaneously, the missive asked the government to increase the employee cap from 250 to 500.
Today, the UK is one of the most vibrant innovation-driven economies in Europe. More specifically, the UK is a noted Fintech hub, frequently topping the global list of financial centers which are conducive to alternative finance and innovation. Brexit repercussions have put that leading position at risk. Brexit has compelled both traditional and early-stage financial services firms to hedge their bets by opening up new offices across the channel and preparing contingencies as the ramifications of Brexit remain largely unknown.
One reason the UK has been a hotbed of entrepreneurship is due to supportive policymakers and a public that is willing to shoulder the risk necessary to back younger firms. Many, if not most, startups will fail but from this creative scrum standouts inevitably will emerge alongside wealth and jobs that drive the economy forward.
The UK has a portfolio of policies in place designed to subsidize risk such as the Seed Enterprise Investment Scheme and Enterprise Investment Scheme (SEIS and EIS) two tax programs that are widely used by investment crowdfunding platforms.
Since EIS was launched in 1993-94, over 29,700 individual companies have received investment through the plan, and £20 billion of funds have been raised. The younger SEIS plan was launched in 2012-13, but in that time 12,900+ companies have received over £1 billion of investment.
Introduced in 2000, EMI is a program where a company may grant share options up to the value of £250,000 in a 3-year period with no income tax paid on the value of the shares when the option was given. If you sell the shares in the future, there may be a capital gain due. A good explanation of the benefits of EMI may be viewed here.
Typically, early-stage firms use shares to incentivize employees and align interests for the company’s success. If the company does well so does the shareholder. Some early-stage companies may be cash poor and shares can provide a meaningful alternative to a high salary.
According to the open letter, the EMI plan has been a “great success” so far with over 8600 UK companies taking advantage of the program. But, the advocates of an update to raise the limits note that current rules are too restrictive and outdated “unintentionally penalising employees of fast-growing tech companies.” If you look at some of the larger Fintechs, it is easy to see that fast growth firms may no longer access the EMI program under the 20-year-old caps. To quote the letter:
“The maturing UK ecosystem now has in excess of 50 tech startups which have surpassed the company size criteria for EMI. As a result, these companies are being forced to adopt less employee-friendly approaches, damaging their ability to attract, reward and retain the best talent. For these larger startups and private companies, the scheme is now inaccessible. The UK must act now to strengthen its thriving tech and financial services ecosystem.”
In an article in the Telegraph, supporters appear to position an EMI update as strengthening the UK market against rivals for talent such as the US – home to many of the biggest names in tech.
In an email distributed by Innovate Finance, the group explained that the UK has “benefitted from a wave of technological innovation which has been the envy of the world.” By increasing EMI limits, policymakers can help fuel this innovation by supporting access to talent and “balancing the risks that come with working at a startup.”
Employees tend to be more dedicated when they have skin in the game.
It is hard to argue against the pitch to improve EMI limits and hundreds of prominent founders have joined to support this initiative which is still accepting sign-ups backing the cause.
What should be an obvious fact to all is that small and mid-sized businesses hold the largest number of jobs in the UK. To quote a report from this past May:
“In the UK alone, they [SMEs] account for 99.3% of all private-sector business at the start of 2016, and 99.9% were small- or medium-sized. Total employment in SMEs, however, was 15.7 million; 60% of all private-sector employment in the UK … Supporting [the] growth of SMEs and startups is essential for the economy of the country in the pursuit of innovation and progress. SME’s combined turnover constitutes almost half (47%) of private sector turnover in the UK, reaching an annual total of £1.8 trillion.”
However you slice the numbers, the message is clear. It is the government’s responsibility to fuel access to opportunity and create a conducive market for innovation. Brexit jitters do not help this mission but good policy can mitigate some of the economic risk.
Our @InnFin CEO @ccrosswell has delivered the EMI letter, with over 200 signatories, to No.10, urging the government to extend a vital tax break to the UK #fintech #tech industry. Great work by our member @Onfido in highlighting this 💪🏼 pic.twitter.com/LWwg5vv2mm
— Innovate Finance (@InnFin) September 18, 2019