Late on Wednesday 4 April, HMRC published Employment Related Securities Bulletin No 27 which notes that State Aid approval for the grant of enterprise management incentive (“EMI”) options will not be renewed by the date the current approval expires (today, 6 April).
The press release can be found at: https://www.gov.uk/government/publications/employment-related-securities-bulletin/employment-related-securities-bulletin-no-27-april-2018.
What does this mean?
Any options granted from 7 April until the new State Aid approval is given may not have EMI tax-advantaged status and may be treated as non-tax advantaged options. This means the generous EMI tax reliefs would be denied, resulting in income tax and potentially National Insurance contributions (NICs) on the full option profit, i.e. the difference between the exercise price and the tax market value of the shares as at the date of exercise.
The advice from HMRC is not to grant any further EMI options on or after 7 April 2018 until this issue is resolved.
HMRC’s position on EMI options granted on or before 6 April 2018 is that they will not be affected and that current guidance and practice will continue to be applied.
HMRC hopes that approval from the European Commission will be received soon.
Background to EMI
The EMI option scheme was introduced in 2000 and is a popular tax advantaged share option scheme for SME companies. It enables qualifying companies to grant share options to their qualifying employees up to a maximum value of £250,000 each, with an overall cap for the company of £3 million.
EMI options have the following tax advantages:
- No income tax or NICs on grant;
- No income tax or NICs on exercise if the exercise price is at least equal to the tax market value of the shares under option as at the date of grant;
- Entrepreneurs’ Relief (a reduced rate of capital gains tax of 10%) on gains realised on disposal of the shares if the option holder remains an employee at the date of disposal and the shares are sold at least 12 months after the option was granted; and
- The employer company obtains a corporation tax deduction on exercise based on the difference between the tax market value of the shares as at the date of exercise less the exercise price.
The tax advantages conferred under EMI are subject to approval under the EU State Aid rules, with the current approval having been granted back in 2009. HM Treasury stated in the 2017 Spring Budget that it would seek timely State Aid approval to extend the provision of EMI. Wednesday’s announcement confirms that the government has been negotiating with the European Commission for renewal of the approval. However, the European Commission’s response is still awaited and there is no indication of a timeframe for this. Whether this is as a result of a delayed application (as a result of Brexit perhaps) by the UK government or another reason, the short notice provided by HMRC and the uncertainty of when EU State Aid approval will be given is unhelpful. We hope that the European Commission will backdate the approval, as it has done for other EU State Aid approvals previously, but there are no guarantees. There is also the possibility of the European Commission setting more stringent qualification requirements for EMI.
We will be watching for further announcements on this matter with anticipation.