Tax: Where now, EMI share options?
Donald Drysdale wonders whether the UK’s failure to secure renewal of EU state aid for EMI share options is a result of important detail being overlooked because of Brexit pressures.
As an alternative to offering employees unapproved share options, certain schemes allow companies to offer tax-advantaged shares to their employees. The most common of these schemes are:
- Share Incentive Plans (SIPs)
- Save As You Earn (SAYE)
- Company Share Option Plans (CSOPs)
- Enterprise Management Incentives (EMIs)
Enterprise Management Incentives
Until very recently, an independent trading company with gross assets not exceeding £30 million was able to offer EMI share options, but only if it was not engaged in excluded activities – namely, banking, farming, property development, provision of legal services, and shipbuilding.
The company could grant an employee options on shares up to a value of £250,000 in a three-year period. On exercise of such an option, income tax and NICs would be payable only if the price paid for the shares was less than their market value when the option was granted. Capital gains tax could be charged on eventual disposal of the shares, but in many cases, entrepreneurs’ relief would be available.
EMI share options have been widely used by qualifying companies. They have offered an excellent means of incentivising and retaining key personnel, and many practitioners have been accustomed to advising their clients on their use. HMRC have a tightly regulated process for EMI share options and monitors them closely.
But then everything changed very suddenly.
The problem with EMIs
Given the widespread use of this form of employee incentive, HMRC’s announcement of 4 April came as a nasty surprise to many companies, employees and professional advisers.
HMRC’s update explained that the Government had failed to secure renewal of the existing EU state aid approval, which was due to expire two days later on 6 April. As a result of this failure, any new share options granted from 7 April onwards cannot currently qualify for EMI purposes.
EU state aid
EU state aid is any advantage granted by public authorities through state resources on a selective basis in situations where it could potentially distort competition and trade in the EU.
Under the EU state aid rules, certain specific UK tax reliefs are permitted only because they comprise ‘notified state aid’. The domestic laws under which such state aid is given are notified in advance to the EC and approved by them. EMI share options fell into this category.
Following the surprise news, the situation is now shrouded in doubt and confusion.
HMRC consider that the state aid approval applies at the time an option is granted, and on this basis have expressed their view (but not stated categorically) that EMI share options granted up to and including 6 April 2018 won’t be affected by this lapse of the approval. There can be no certainty that a Tribunal or Court would share this view.
Purported ‘EMI share options’ granted from 7 April 2018 onwards will be ineligible for the tax advantages previously afforded to employers and employees, unless new approval is obtained and it is back-dated. Until more is known, it must be prudent to assume that any such options granted from 7 April onwards may never qualify to be treated as tax-advantaged share options.
Implications for employees and employers
If EMI share options already granted up to 6 April become unapproved, or if new options are granted after that date because the full implications of the announcement haven’t yet been understood by all concerned, employees may face unexpected income tax and NICs when they exercise their options. This also seems to create a need for employers to deduct and account for that income tax and NICs under PAYE – at least on a protective basis.
The wording used by HMRC could be construed as hinting obliquely that, if state aid approval is renewed, it might be applied retrospectively from 7 April. On reflection, this seems unlikely, because there might be difficulties in dealing with cases where share values had changed significantly between the grant of the option and the date of the new approval.
An alternative suggestion from some advisers is that companies which had granted unapproved share options after 6 April might find ways to re-grant them as new EMI share options under the new approval. However, it is unclear exactly what will happen or whether such replacement would be feasible.
It is not only employees who will suffer. Employers may also expect to lose their right to a corporation tax deduction at the time when EMI share options are exercised.
What will happen next?
The Government is seeking to renew the state aid approval in question. However, it seems unrealistic to assume that this will be given a high priority, or that the UK will be granted any special favours, when the protracted Brexit negotiations may be winning us few friends in the corridors at Brussels.
Following Brexit, or more likely following the end of the proposed transitional Brexit period, EU state aid rules may cease to apply to UK businesses except those with subsidiaries in EU member states.
That won’t necessarily make things any easier. The World Trade Organisation (WTO) Agreement on Subsidies and Countervailing Measures imposes limits on the use of subsidies and (unlike EU state aid) has no advance notification procedure, so such subsidies may be challenged retrospectively.
Why was an earlier warning not given?
Did those responsible for employee share schemes, either at HM Treasury or HMRC, think that two days’ advance warning was adequate to alert companies and professional advisers that state aid approval for EMI share options was not going to be renewed? Or were they so over-confident that they never imagined that the renewal would not be granted in time?
Either way, this looks like a serious breakdown in communications which many taxpayers and their advisers will find it hard to forgive.
Article supplied by Taxing Words Ltd