Enterprise Management Incentive ("EMI") option plans are one of the very few UK tax advantaged option plan arrangements.
Companies qualify to grant EMI options if they meet qualifying criteria, including:
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having fewer than 250 full time employees (or equivalent)
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having gross assets of no more than £30 million; and
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carrying on a qualifying trade.
The exercise of qualifying EMI options can be free of UK income tax (which is currently 45% at top rates). EMI options granted with an exercise price at or above the market value of the shares at the date of grant are income tax free on exercise. Discounted options will incur an income tax charge on the discount element. Significantly for employers, no national insurance contributions (currently 13.8%) are payable on qualifying exercises. Any capital gain arising on disposal of the shares may benefit from Entrepreneurs' Relief and so a beneficial tax rate of 10% as opposed to the normal UK capital gains tax rate of 20%.
As a result, EMI option plans have been very popular with start-ups, with venture capital backed companies and with smaller companies generally, and used as an effective means of incentivizing employees.
Unfortunately for the UK and such companies, the current EU State Aid approval for EMI option plans expired on the 6 April 2018.
The UK government applied to the European Commission for fresh approval ahead of the 6th April 2018 expiry date, but is still awaiting the Commission’s response.
As a result, on the 4th April 2018, HMRC published their Employment Related Securities Bulletin No 27 (April 2018) which stated that in their view:
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State Aid approval applies to share options granted up to and including 6 April 2018; and
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EMI options granted in the period from 7 April 2018 until EU State Aid approval is received may not be eligible for the tax advantages normally applicable to EMI options.
HMRC has therefore recommended that companies should delay the grant of employee share options intended to qualify as EMI share options until fresh EU State Aid approval has been given. The tax treatment of EMI options granted on or after 7 April 2018 is not clear.
It is uncertain at this stage how long it will take to obtain EU State Aid approval, or indeed that it will be forthcoming. However, the current expectation is that a fresh approval will be granted, so it is worthwhile waiting. If delaying grants is not appropriate for your business, please let us know and we can discuss alternatives.
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