13 April 2018
Background to EMI
The EMI scheme legislation was introduced to help smaller, often start-up, companies to attract and retain high value employees. Employees may be granted an option to acquire shares in the company worth up to £250,000; at a point in the future or following a predetermined event. There are a number of eligibility conditions to satisfy but the EMI scheme does offer some key tax advantages.
EMI scheme advantages
No income tax or NI will arise when the option is exercised provided the employee pays at least full market value at date of grant. On a subsequent disposal capital gains tax (CGT) will be payable if the shares are sold at a profit. EMI shares may qualify for Entrepreneur’s Relief in certain circumstances, hence CGT paid at the lower rate of 10%.
In contrast, for non-approved options the employee will pay tax (and potentially NI) based on the market value of the shares at exercise less the price paid. On disposal any increase in value between exercise and disposal is exposed to CGT; any earlier increase in value being previously caught for income tax.
Provided that certain conditions are met, the company may be eligible for corporation tax relief on the exercise of options granted under EMI.
The company has complete flexibility in terms of who it incentivises and rewards. It is also possible to include performance related targets and this may therefore help the company to meet long term objectives. From the employee’s point of view they have certainty as to the cost of acquiring the shares.
Uncertainty post 6 April 2018
HMRC recently announced that EU State Aid approval for the EMI scheme expired on 6 April 2018.
HMRC considers that EMI options granted up to and including 6 April 2018 will not be affected by this lapse. Although the position is perhaps not clear cut for options granted before that date and to be exercised in the near future.
EMI options granted from 7 April 2018 until EU State Aid approval is received might not be subject to the tax advantages outlined above. HMRC’s current guidance is that companies may wish to consider delaying the grant of employee share options intended to qualify as EMI share options until fresh EU State Aid approval has been given; further updates will follow in due course.
It remains to be seen if this typifies the difficulties we may face with other reliefs subject to State Aid approval rules in light of Brexit. However, for now, it is likely to cast unwelcome doubt for those with existing EMI schemes. For companies currently weighing up their options to reward key employees this may be a good time to take stock and explore alternative share based incentive schemes.
If you would like to discuss this further, please get in touch with your usual UHY contact.
