Market leading insight for tax experts
View online issue

HMRC evaluation of EMI scheme

printer Mail

HMRC commissioned independent research in 2017 to evaluate how the enterprise management incentive (EMI) scheme is working for businesses and the impact it has had on recruitment, retention and business performance.

The EMI scheme was introduced in 2000, aimed at allowing smaller, higher-risk companies to offer tax-advantaged share options to help recruit and retain employees with the skills to aid their growth. Firms in qualifying industries, with total assets under £30m and fewer than 250 workers, are eligible. Employees must dedicate at least 25 hours a week, or 75% of their time, to the enterprise. Since its introduction, the number of firms using the scheme has increased from 790 in the first year to 8,610 in 2015/16.

The research included:

  • a telephone survey of EMI users (between 24 August and 24 October 2017);
  • a review of secondary literature and a series of analyses of firm and worker-level data to examine the range of ‘market failures’ put forward to justify the subsidy implicit in the scheme and test the validity of the economic case; and
  • econometric analysis (comparing those who adopted EMI between 2012 and 2014 to a control group who joined the scheme in 2015/16) to explore the causal effects of EMI on its intended outcomes.

Overall, the findings confirmed the presence of those factors in the market which affect small, growing businesses. These include:

  • lack of available information for prospective employees on levels of risk associated with small companies;
  • external funding constraints, which in turn inhibit R&D activity; and
  • the inability of wages alone to create effective financial incentives for employees in early stage businesses.

The primary survey found that although only a small proportion of firms using EMIs identify themselves as ‘high risk’, it indicated that the scheme was being used as a recruitment and retention tool in line with its objectives. Respondents said they had mostly introduced EMI for retention rather than recruitment purposes. Few companies offered EMI to all staff, and seniority was by far the most common criteria for eligibility within firms. There was less evidence that the scheme was being used specifically for the rewarding of skills or for individual performance.

The majority of scheme users perceived EMI to be successful in helping companies retain key and skilled staff (84%) and improve staff morale (85%). Just over half said that EMI had helped with the recruitment of key workers (54%) and attracting higher quality employees (52%). This is consistent with the findings of the 2008 study, where 92% cited retention as the most common reason for introducing EMI, while 39% gave recruitment as the driving factor.

In contrast to the perceptions of the companies interviewed, the econometric analysis indicated that EMI has had a positive effect on recruitment, through a reduction in the proportion of hard-to-fill vacancies (10% among the early adopters and 4% for the control group). However, the analysis found no measurable effect on retention rates. The results also showed that the effect of adopting EMI feeds through into growth in the number of employees (estimated at 26% over three years).

The econometric analysis found that EMI had yet to have an effect on turnover, output or productivity growth amongst early users of the scheme.


Issue: 1404
Categories: News