Mind the Gap: EMI options cannot be granted now!

Last week HMRC published an Employment Related Securities bulletin that could have important consequences for companies which offer EMI options, and particularly for those looking to grant EMI options in the near future.  The bulletin confirmed EU state aid approval for the EMI scheme has now expired, and whilst the government is currently in the process of reapplying for this, any EMI options granted in the interim period may not be eligible for tax advantages.

 

Background

The Enterprise Management Incentive (EMI) scheme was introduced by the Finance Act 2000 as a way of helping small companies with growth potential to attract and retain key employees by rewarding them with share options up to the value of £250,000.  The favourable tax treatment and flexible terms available makes the scheme attractive to both companies and employees alike.

 

The issue

Unlike other tax-advantaged share schemes, EMI options are considered to involve the provision of state aid by the UK government towards the companies granting them.  As this is generally unlawful under EU treaties, the EMI tax regime is subject to EU state aid approval rules.

As of 6 April 2018, state aid approval for the EMI scheme has expired.  In the past, renewals of this approval have been granted without much concern, so this late announcement comes as somewhat of a surprise.  While there is no indication at this stage that fresh approval won’t be granted, it is perhaps another reminder that with Brexit looming large, we should be mindful that our interactions with the EU shouldn’t be assumed to be “business as usual”.

While no timescales have been provided for a decision from the EU Commission, HMRC have provided reassurances that the government is working hard to ensure the period between the expiry of the previous approval and a decision on fresh approval is as short as possible.

While companies will be relieved that EMI options granted on or before 6 April will not be affected by this, the implications for options granted in the subsequent lapsed period will be significant.  Without state aid approval, they will be treated as non-tax advantaged employment-related securities options meaning they would be subject to both income tax, and also employer’s and employee’s national insurance contributions on exercise.

 

Take home message

Companies wishing to grant EMI options in this interim period should hang fire and delay the grant of options until fresh approval is given.  If companies don’t mind the gap, it could cause disastrous tax implications for both the employer and employee!

 

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