ETASSUM52030 - Enterprise Management Incentives (EMI): Qualifying companies: Independence requirement

Paragraph 9, Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

Paragraph 9 sets out certain conditions which need to be met for a company to meet the independence requirement.

The first condition is that the company is not: 

  • a 51% subsidiary of another company (that is, more than 50% of its ordinary share capital must not be owned by another company); or  

  • under the control of another company, or another company and any person connected with that other company, without being a 51% subsidiary of that other company.   

The second condition is that: 

  • no arrangements are in existence by virtue of which the company could become such a subsidiary or fall under such control; that is, the arrangements could result in the company not meeting either requirement of the first condition (arrangements with a view to a qualifying exchange of shares do not count for the purposes of this condition (ETASSUM55020)).   

The independence requirement is treated as met if the company is subject to an employee-ownership trust (within the meaning of paragraph 27(4) to (6) Schedule 2 ITEPA 2003). 

Meaning of Control 

If a person has the power to ensure that the affairs of another company are conducted in accordance with their wishes, then they have control of the company. Control will normally be at the participator or general meeting level. A necessary element of control is the ability to determine the composition of the Board, or failing that, to appoint directors who have the power to impose their decisions on directors appointed by any other shareholder. This may be through share ownership, voting power, or because of any powers conferred by articles of association or other document, (Sections 719 ITEPA 2003 and 995 Income Tax Act 2007 (ITA 2007)).   

Any view on control requires careful consideration of the underlying facts.  

Corporate Structures

If a prospective EMI company sits in an organisational structure which involves one or more partnerships, and there are companies in this structure, consideration will need to be given to the control of the partnership. 

Section 6 of the Limited Partnerships Act 1907 (LPA 1907) provides that a limited partner may not take part in the management of the partnership business. If there is a structure in which there is a limited company as the general partner of a Limited Partnership and the Limited Partnership has a controlling interest then HMRC consider the general partner to have control of the EMI company, in accordance with paragraph 9(2)(b)(i) Schedule 5 ITEPA 2003 and section 995 ITA 2007 (and therefore the independence requirement will not be satisfied). Where there is a layered structure with a number of general partners then the “ultimate” general partner would be deemed to have control (if that ultimate general partner was a limited company, the independence requirement would not be satisfied).  

In cases where the Limited Partnership can gain control in certain circumstances then if those circumstances are not considered to amount to distress provisions but instead provide the investor with protection against the ordinary risk of making an investment then HMRC will consider the independence requirement will not be met. (ETASSUM52031). 

Where a partnership controls an EMI company and any one of the partners is a corporate entity, the EMI company would not meet the independence requirement as it is under the control of another company and persons connected with it (i.e. the other partners) as per paragraph 9(2)(b)(ii) Schedule 5 ITEPA 2003 without needing to consider who ‘controls’ the partnership itself (Sections 718 ITEPA 2003  and 993 ITA 2007). 

HMRC do not treat Limited Liability Partnerships (LLPs) as companies for the purposes of Schedule 5 ITEPA 2003. Accordingly, if an LLP controls an EMI company (and does not have a corporate partner) then this would not prevent the company from satisfying the independence requirement.