EMI Share Option Schemes – Current Hold on Tax Benefits

The HMRC tax approved Employee Management Incentive (EMI) Share Option Scheme is the most widely used by small and medium sized (SME) companies.  As an approved scheme EMI offers very valuable tax benefits along with commercial flexibility enabling the design to align business and employee goals. 

Essentially, an EMI enables a company to grant options to selected employees to acquire shares at some point in the future but at a price that is fixed now and agreed with HMRC.  So no income tax exposure for the employee on future growth.  Any growth in value over and above the option exercise price is charged only to capital gains tax, potentially at a rate as low as 10%, when the shares are eventually sold.  Comparing this to an unapproved scheme where income tax, potentially as high as 45%, would normally be due on the market value of the shares and any potential growth.

EU State Aid Approval

HMRC has confirmed that the EMI Scheme and its associated tax benefits rely on EU State Aid Approval and that it has failed to renew this approval before the current approval expired at 11pm on 6 April 2018.  We currently have no indication as to the timescale for renewal and as a result there will be a period between lapse of the existing approval on 6 April 2018 until a new agreement is reached.

Existing Options

HMRC has indicated that the tax benefits for EMI options granted up to and including 6 April 2018 should not be affected as EU State Aid approval continued to apply up until that time.

New Options

Any EMI options granted in the period from 7 April 2018 until fresh EU State Aid approval is agreed may not be eligible for the tax benefits usually associated with the scheme and as a consequence may be deemed to be treated as unapproved options.

Recommendations

Companies intending to grant options under the EMI scheme should therefore consider their position carefully.  HMRC is recommending that “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”.  Furthermore, companies may need to revisit any share valuations recently agreed with HMRC in anticipation of granting EMI options in the event that fresh EU State Aid approval is not obtained before these valuations expire.