Budget 2023 and Business Tax Incentive Schemes

In this post about the recent Budget and how it may affect entrepreneurs and businesses, we take a quick look at three incentive schemes that may be of interest and for which you may be eligible.

Enterprise Management Incentive Scheme (EMI)

Share options are a very flexible way to attract and retain employees. However, while normally an employee can expect to pay income tax (and possibly National Insurance (NI) too) of up to 50% on any profit made on the subsequent sale of the granted shares, there are various tax-advantaged Government share and option schemes available.

Benefits of the scheme

EMI is widely thought of as one of the best of these schemes and provides that no income tax or NI is payable at the time of the grant of share options under the scheme. When option shares are sold, the employee will be liable for capital gains tax (CGT), currently at the Entrepreneur’s Relief rate of only 10%, rather than income tax. The employee can also use their annual CGT exemption.

If the option’s exercise price is set at the same or a higher price than the agreed market value of shares on the date that the option is granted, then no income tax or NI is payable when the option is exercised.

EMI also allows organisations to agree the sale value of the shares with HMRC and that value can then be frozen for up to 10 years, creating the potential for even greater profit on sale and making the scheme a powerful employee incentive.

The costs of setting up and administering an EMI scheme will be a deductible expense for the company against corporation tax. The net market value of the options exercised by employees may also be an allowable expense on exit.

Eligibility and compliance

EMI share options are available to smaller companies that meet specific criteria. For example, at the time the options are granted the company must have less than 250 employees and they must be independent (in the case of subsidiaries the rules can be complex). Certain activities are also excluded from the scheme such as banking, property development, managing hotels or care homes, and forestry.

The government has now announced changes to the EMI compliance requirements, relating to the way in which EMI plan documents must be drafted, and the period for notifying the option grants to HMRC.

In brief, the changes will apply from 6 April 2023 to remove the requirement for the company to set out within the EMI option agreement the details of any restrictions on the shares to be acquired under the option.  They also remove the requirement for the company to declare that an employee has signed a working time declaration when they are issued an EMI option.  This does not remove the working time requirement itself.

From 6 April 2024, the government will also extend the deadline for notifying an EMI option from 92 days following grant to the 6 July following the end of the tax year, which coincidentally is the usual date for annual share scheme reporting.

Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) offers tax-efficient benefits to those who invest in small and early-stage startup businesses in the UK. The scheme makes it easier for new-born businesses to secure the early investment they need and also makes the UK attractive for new business ventures.

The main advantages for investors are:

• Income tax relief up to 50%.  Potentially, a £100,000 investment could provide a £50,000 saving on that year’s income tax liability (provided you have sufficient income tax liability in the first place and hold the shares for at least three years). 
• Capital Gains Tax (CGT) relief on shares disposed of after three years. CGT is not normally payable when realising SEIS shares, if you have claimed income tax relief on them and the companies still qualify. 
• Capital Gains Tax Reinvestment relief when investors use gains to reinvest in SEIS eligible companies.
• If you lose your investment you can choose to offset any loss, less the income tax relief received, against your income tax bill. 
• The option to apply tax relief to a previous year (carry-back).
• Inheritance tax relief. An investment in a SEIS-qualifying company should benefit from 100% relief from inheritance tax, provided the investment is held for two years and at the time of death. 

From April 2023, companies will be able to raise up to £250,000 of Seed Enterprise Investment Scheme (SEIS) investment, a two-thirds increase. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from two to three years. To support these increases, the annual investor limit will be doubled to £200,000.

Incentives to go back to work: childcare support

Working parents in England will be able to access 30 hours of free childcare per week, for 38 weeks of the year, from when their child is nine months old to when they start school.

This will be rolled out in stages:

• From April 2024, all working parents of two-year-olds can access 15 hours per week.
• From September 2024, all working parents of children aged nine months up to three years old can access 15 hours per week.
• From September 2025, all working parents of children aged nine months up to three years old can access 30 hours free childcare per week.

Where parents need childcare for more than 38 weeks a year, they are able to spread their free hours entitlement over a higher number of weeks.

The government will substantially uplift the hourly rate paid to providers that deliver the existing free hours. It will also change the staff-to-child ratios for two-year-olds, moving from 1:4 to 1:5 and provide start-up grants for new childminders, including for those who choose to register with a childminder agency. Childminders who register with Ofsted will receive a start-up grant of £600, whereas those who register with a childminder agency will receive £1,200.

As always, the contents of this post are meant as guidance only and if you have any concerns or wish to discuss any of the issues arising, please get in touch.