HMRC and the Government have really managed to get themselves into an embarrassing “pickle”. A few days before the fiscal year end (5-April-18) HMRC issued a notice to say that state aid approval for EMI share schemes would expire on the 6-April-18.
EMI stands for Enterprise Management Incentive and this is a UK government scheme which gives employees the right to buy shares within their company. These are commonly used to incentivise and retain key employees in small to medium sized companies. With the right setup, the tax saved can be as much as 25% of the value of the options, making it the most beneficial tax structure for employees.
Technically because of this recent change, share options issued today under an EMI scheme would and should be treated as unapproved share options, until the UK manage to get formal approval from the EU.
In speaking with other professionals, the expectation is that EU approval should be a formality and is most likely to be obtained within the short term. There is also general consensus that this is likely to be back-dated to cover this time-gap, albeit until we get guidance from HMRC we are all in the dark. Note, however, there may be little incentive for our EU friends to grant approval or even hurry things along.
What should you do in the interim? You need to weigh up the following:
- The contractual requirement to issue options
- The current market value share price
- Any future close period
- Dates that RemCo and the Board can approve these grants
Most appear to be going ahead and granting share options as if the EMI scheme will be retrospectively applied. If retrospective approval is provided then there could be a practical solution:
- Leave them as they are
- Cancel and reissue
- Parallel options
- Compensate in some other way
Either way, the situation is not great and we need HMRC to provide guidance on this. They remain silent.
I have written to Mel Stride MP, who is Financial Secretary responsible for HMRC. When I get a response, I will publish this if it provides any comfort or direction.
We work with many SMEs and can provide advice on the commercial, accounting and tax implications of share schemes. As a Chartered Accountant and registered auditor I've worked with many SME’s who operate share option schemes and would be happy to discuss this matter or any other with you.
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Update as of Mon 14th May
Following on from my original article -
this letter was received from HM Treasury. Unfortunately the situation still remains unclear.
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Update as of Tues 15th May
The situation is now a little clearer. The EU commission has now given state aid approval, and companies can now grant EMI options. However, neither the EU or HMRC have confirmed whether this approval is to be back dated to the 6 April 2018 for companies that granted options in this interim period.
Update as of Wed 18 July
Email from HMRC dated 18 July 2018:
Thank you for your email and please see the below questions and answers in relation to your email.
Q: What does this mean for share options granted after 6 April 2018?
A: HMRC will treat share options granted from 7 April 2018 as continuing to receive the tax advantages offered by EMI. Companies using the scheme should be aware that hypothetically an affected third party could challenge aid granted for the period 7 April-15 May. However, HMRC considers that on a practical level this is unlikely, and, even if there should be a successful challenge, the cost to the company would be a repayment of interest on the aid awarded during the 5 week gap and not a repayment of the aid itself.
Q: Can companies cancel options without affecting their limit?
A: Yes. This is entirely a decision for individual companies but HMRC will waive the three year limit in relation to any cancelled options granted between 7 April 2018 and 14 May 2018.