EMI becomes oh my….

So, as a nice Easter treat for us all, HMRC announced on 4th April that EMI schemes would lose their tax-advantaged status after 6th April 2018. Nothing (really, nothing!) like providing advanced notice on that one…

Why is this?

In order to maintain their tax-advantaged status EMI schemes require EU State Aid approval. The current approval expires on 6th April 2018 and the government is seeking renewed approval as we write. HMRC have issued an assurance that they are working on getting this ‘as soon as possible’. Until this happens, however, any share options granted under EMI schemes after 6th April will not be guaranteed the tax-advantaged status they previously enjoyed.

What does this mean?

This means that any options granted to employees from 7th April 2018 might incur an income tax (and national insurance) liability for the employee on the difference between the price paid for the shares and the value at the date the options are exercised. This is instead of paying capital gains tax with entrepreneurs’ relief at just 10% and then only when the shares are sold and not when they are acquired.

Any options granted up to and including 6th April 2018 are not affected and will continue to enjoy the tax advantages. But don’t forget to make sure both the scheme and the options are registered with and notified to HMRC on time otherwise they will lose the tax advantages and you’ll be back to square one!

So what should you do now?

  • It may be best simply to wait and see….previously State Aid approval has been granted retrospectively but there are no guarantees. If you can delay the grant of options it may be worth doing so. If you have obtained a valuation agreed by HMRC make sure you check when the valuation expires first. If you do decide to grant options after it has expired review the situation before granting options to decide whether a new valuation would be required.
  • You could go ahead and grant the options now. If your options are exit-based, so the employees are not expected to acquire shares until immediately before a sale, you may not be concerned. Albeit the possible income tax charge will be unwelcome and there would also be employer’s national insurance contributions at 13.8% on the option gain. If the approval is applied retrospectively, tax advantages will be restored.
  • You could grant them now and be prepared to surrender and re-grant later if retrospective advantaged status is not granted.
  • Consider other types of share scheme. It may be possible instead, for example, to issue all of the shares you intended to grant options over now particularly if the exercise price is very low and does not present an obstacle to the acquisition of shares by your team. This would alleviate the risk of possible additional tax charges later. You can add in buyback conditions to ensure that you can get the shares back if performance conditions are not met later to achieve the same aim as performance-vested EMI options or simply if an employee leaves.

Make sure you register any options granted within the deadline. It appears that EMI options granted within this period of uncertainty should still be registered as EMI options. So you have 92 days from the date of grant to notify HMRC using the ERS Government Gateway Portal.