Most of you will know about the tax benefits of EMI options. As a quick recap these ‘special’ options have the following key benefits:
1. Any profit from the disposal of option shares will be at capital gains tax rates and the first £1m is likely to be taxable at 10% (because of special rules about Business Asset Disposal Relief (BADR) for EMI options if there is two years between grant of the options and ultimate share sale).
2. Because the exercise price will usually incorporate a minority discount, this means that option holders can ‘see’ a potential gain even at the point of grant. For example, using a 75% minority discount, a 5% holding in a £2m company would usually have an exercise price of £25,000 when it would actually be worth £100,000 on a future sale of the whole company.
3. The company enjoys a corporation tax deduction in respect of the difference between the exercise price and market value of the shares on exercise.
The first point is what is particularly special in EMI options, because ‘normal’ unapproved options will trigger much higher rates of income tax.
There are various conditions for qualifying EMI status to be viable. These relate to the quantum of options and size of company etc, but by far the most ‘boring’ condition is the one which requires the grant of any EMI options to be notified to HMRC within 92 days.
Missed 92 day deadlines
If the 92 day deadline is missed then the default position is that the options are unapproved options. The consequences of this could be severe. Imagine having to tell an option holder that their tax liability on an exit event is calculated at 45% rather than 10%!
All may not be lost as HMRC do have some scope to extend the deadline if there is a reasonable excuse but this is generally difficult to obtain.
Another option may be to cancel existing options and reissue with a correct and timely notification. The problem here may be that any valuation agreed with HMRC may have lapsed and also that the company may have increased in value. Another issue would be if the late option grant prevented the required two years from elapsing between grant and sale, for the special 10% BADR rate to apply.
Forbes Dawson view
The main message is do not forget to notify HMRC of the grant of EMI options within 92 days. A practical tip is to make sure that everybody knows who will be doing this at the outset and that it is not a boring piece of administration but rather something which is critical to the relief. Also, it is worth leaving good time to allow for possible glitches in HMRC’s online system and make sure you take a screen shot to evidence that the notification was actually made.
When problems do arise here, although a cancellation and reissue may work, it will usually make sense to ask HMRC to allow an extension, although this will not be easy.
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