The advance disclosure desired by HMRC and how it affects employee related securities and private equity.
We hope that you enjoyed some quiet time over the Easter week. As you know, we are in the new tax year and moving forward with lots of interesting conundrums as new rules come into play for inheritance tax, business relief and dividend tax amongst others.
This week we’ve been thinking about how employee related securities can be taxed by HMRC and the role of private equity in designating a company as a close company. It’s a fascinating loophole where a private equity backed company, if over half the assets would be distributed to five or fewer people, would be a close company regardless of whether there were one or 10,000 other shareholders in that company.
Maybe you’ve heard that KKR and Mubadala have agreed the sale of CoolIT Systems to EcoLab for $4.75b? KKR gave all the employees of CoolIT Systems equity, which is KKR’s America-focused team’s normal practice when acquiring a company. So, this sale means that all the employees are receiving bumper payouts, even if they have joined the company in 2026 (the payments taper based on how long the employee has worked for CoolIT Systems).
We are not privy to the exact details, but Canada does offer certain tax advantage schemes which are similar to UK schemes such as EMI. Therefore, one hopes that the bumper payment didn’t come with a nasty tax sting attached.
It appears that KKR and Mubadala received more than half of the value of the assets. If CoolIT Systems was under the UK tax regime, it is quite possible that CoolIT Systems would have been designated as a close company on this basis.
Fortunately close companies can also set up EMI schemes provided the conditions are met.
[Close company status alone does not disqualify a company from setting up an EMI scheme. However, for many PE-backed companies, a more fundamental challenge is relevant: the EMI independence test requires that no other company owns or controls more than 50% of the ordinary share capital. Where a PE firm holds a majority stake, the company will usually fail this test and be ineligible to grant EMI options regardless of its close company status. For PE-backed companies where the investor holds only a minority stake and the independence test is therefore met, EMI may still be available — but specialist advice should be taken before setting up an EMI scheme.]
CoolIT Systems prompted our interest because of the size of the exit. As you will know, there is a major push by HM Government to back the 200 highest potential companies at pace and scale and, presumably from that cohort, to create the UK’s first $1t company.
You may ask why this is relevant to share valuations? The reason is that companies that are scaling up very fast indeed will see a massive changes in valuation over a very short space of time. We all know that AI is the current favourite for being the home of the first $1t company, (and it’s worth pointing out that CoolIT Systems are a picks and shovels company in the AI sector).
This makes EMI valuations much more complicated than you might think. The first complexity is the new EMI rules allow for larger companies to set up EMI schemes. It will be impossible for the EMI valuation in those scenarios to not fully recognise that the company has significant sales and profits, so the UMV and AMV will definitively have to be much higher than people are used to seeing in a bog-standard EMI valuation.
The second complexity is that very early-stage companies, which have very high growth ambitions and which want to set up an EMI scheme (even when their balance sheets have de minimis assets and sales are yet to emerge) will have to recognise in an EMI valuation that the future growth is planned for, and indeed revenue could go to billions within 18 months. This means that the UMV and AMV valuation will also have to be high, with all the consequences that creates.
In our valuations reports, we specialise in articulating these issues in a way which is easily understood and proved. This makes the reports defensible in a world of shifting sands.
If you have a company where the EMI valuation cannot be obvious because of the facts, we can certainly help to provide the valuation using the correct mathematics and arguments to support the UMV and AMV valuations. We also value CSOPs, 409a share issuance, fair market value and EOTs amongst other scenarios relevant to employment related securities and private equity. Please give us a call to discuss the details.
