On 4th April, HMRC published its Employment-related Securities Bulletin No 27 (April 2018) advising that EU State Aid approval for Enterprise Management Incentive (EMI) share option schemes, would expire on 6 April 2018. The government is in the process of applying for fresh approval but it is not known how long this process will take.
As a result, EMI share options granted from 7 April 2018 onwards may not qualify for tax relief.
What is the EMI Scheme?
The EMI scheme is designed for trading companies that have gross assets of no more than £30 million. It provides generous reliefs, including the ability to take advantage of the entrepreneur’s rate of capital gains tax on the sale of shares resulting from the exercise of an option without having to meet the normal requirements. As a result, it is the most popular share option scheme in the UK and is widely used by companies wishing to provide some form of equity incentive to their staff.
When Will EU State Aid be Renewed?
This is currently unknown. The UK Government is attempting to negotiate the reinstatement of EU State Aid approval, but no one knows when this approval will be granted. We also don’t know, assuming it is granted, whether it will be backdated to 7 April 2018.
Companies should then consider that tax relief for the EMI scheme may only apply from the date the approval is reinstated or from another specified date. It is possible that the EU State Aid approval may not be renewed for the EMI scheme before the UK leaves the EU in 2019.
In HMRC’s own words: “Companies may wish to consider delaying the grant of employee share options intended to qualify as EMI options until fresh EU State Aid approval has been given.”
The safe assumption is that EMI share options granted in the period from 7 April 2018 until EU State Aid approval is renewed will be treated as non-tax-advantaged options.
Are Existing Share Options Still Eligible for Tax Relief?
Share options granted and exercised up to and including 6 April 2018 won’t be affected.
For existing EMI share options (granted prior to 7 April 2018) which have not been exercised, HMRC has said that it will continue to apply its current guidance, so it seems that it will consider those share options to be approved. However, this cannot be entirely free of doubt.
Implications for Employers
There are a number of important considerations to take into account if a company is preparing to grant EMI share options. These are as follows:
- Any share options granted which do not qualify for tax relief are treated as non-tax advantaged share options and so subject to PAYE and NIC on exercise.
- The grant of EMI share options is usually based on a valuation of the business agreed with HMRC, which is valid for 60 days. A delay in re-obtaining EU State Aid approval could mean companies will need to either request an extension to this or reissue their valuation application in respect of proposed EMI options granted from 7 April 2018.
Further reading: HMRC ERS Bulletin No.27 (April 2018) EMI State Aid
If you require further information, or would like to discuss either existing or intended options, please contact Mark Wildi on 01689 877081.