This is a little later than planned – we needed time to process the Budget announcement and what lay behind it.
As valuation experts, we look at the implications of budgets through a particular lens, to consider the impact on clients and the projects we’re likely to encounter in the coming months. In the Budget the week before last, we were particularly drawn to the changes relating to EMI and EOT schemes and also the ramifications of the uplift in the minimum wage.
Taking the last first, the minimum wage uplift really matters. It has clear negative connotations for retail and hospitality company valuations, where they still think that people provide better service than robots or screens. But it is also pertinent for other industries, as it has effectively made a typical graduate entry job a minimum wage job too. This sets up a potentially worrying situation, where the point of tertiary education will increasingly be debated. For now there is a surplus of graduates, so pressure on wages will be low, but we can see a world where many industries that need graduate talent end up seeing increased pressure on payroll costs and the consequential impact on profits and therefore equity value.
Back to share incentive schemes,the EMI scheme eligibility criteria have been extended significantly. It has been designed to support scale-ups as well as start-ups. For us, this means that EMI scheme valuations will be performed on companies that are more mature. As night follows day this means EMI valuation exercises will become more complicated. Establishing the equity value in a company that may have large sales but no profits, more complicated cap tables with a wider variety of shares and share classes, more labyrinthine articles of association and additional waterfall layers, let alone being heavily indebted, will mean you cannot turn out a valuation using an online tool in a day. We are anticipating some pretty robust debates around AMV and UMV. As always, we want to be having those debates with clients, to avoid the clients having them with HMRC!
It may be worth starting to educate the market now that low values for AMV and UMV will no longer be a given. Let us know if it would help you if we joined a call or meeting to provide context for you and your colleagues, prior to them speaking to clients.
We are also anticipating that HMRC will be increasingly forensic in its analysis. This heightens the importance we are placing on sound assumptions, clear and well-presented arguments, and the highest quality of analysis, to ensure ultimate defensibility.
It is worth noting that the increase in the maximum option exercise period, from 10 years to 15 years, might result in a desire from clients to restructure their current schemes. However, this requires care – it’s not as simple as adding five years. Option pricing models will provide different valuation outputs, changing the value of the options.
Another interesting point that has emerged from the changes to EMI Schemes is that companies may decide to retire their unapproved share option schemes in favour of the more tax efficient EMI scheme. HMRC will regard this as a new EMI scheme application, requiring a re-valuation. It won’t be possible to simply switch the unapproved options into the EMI wrapper without considering this issue.
If the company has done well since the original scheme was set up, HMRC may argue that there has been an increase in the market value of the shares under option, which means the employee has a greater tax liability. We are not tax advisers – if you are not one yourself, it is probably worth reaching out to your specialist colleagues to make sure that everything has been considered in this area. However, ,we can help you to establish value prior to the tax talk if that would help.
We think there will be a greater need to get a valuation prepared to help the planning process around employee incentive schemes, rather than the current scenario where the valuation is used later to help get the scheme set up.
Next week we will give you our thoughts on EOTs.
