Small businesses to keep employee tax break

The UK government lobbied the Commission hard on the issue

Small businesses will find it easier to recruit and retain highly skilled employees after the European Commission gave long-term approval to a new incentive measure.

Enterprise Management Incentives (EMI) provide a tax break on share options offered by small and medium-sized enterprises (SMEs) to their employees, enabling them to attract staff who would otherwise seek higher salaries elsewhere.

The government says the certainty provided by the granting of European Commission approval – which lasts until 2018 – together with new eligibility criteria will provide a boost to the 9,000 companies that currently offer share options to their employees under EMI.

Economic secretary to the Treasury Ian Pearson said the move will encourage take-up among high-growth small firms that will play a vital role in driving the UK out of the recession.

"This is excellent news for small and medium-sized companies, particularly at a time when their success will be crucial to economic recovery," he said.

"Long-term state aid approval of EMI provides certainty over the future of the scheme, while the relaxation of eligibility requirements will help SMEs with substantial international activities to recruit highly skilled UK-based staff."

The government says it lobbied the European Commission strongly to approve the changes.

Rules will also be relaxed on whether firms have to be based in the UK so that a company is only required to have a “permanent establishment” in this country.

This will help UK SMEs with substantial overseas activities to recruit highly skilled UK-based staff and allow UK taxpaying staff of overseas SMEs that have a permanent establishment in the UK to benefit from the scheme.

In 2007/08, the latest year for which data is available, 2,830 companies issued share options under EMI to 26,400 employees.

The changes will be legislated in the Finance Bill 2010 and are due to take effect from 6 April 2010.