13 June 2017
Not too long ago we posted a tax blog on the general benefits and advantages of employer companies granting Enterprise Management Incentive (EMI) options as a means of motivating, retaining and recruiting key employees. EMI arrangements have been a solid piece of UK tax law since the year 2000.
The purpose of this blog is to take a further look at EMI arrangements, and to recommend that share plans – existing or not – are unambiguous and up to date.
There are a number of conditions and requirements set down in tax law that must be met for the arrangement to rank as a tax favoured EMI scheme. It is sometimes the case that share schemes will set milestones or targets that must be met before options vest. The share scheme rules and the targets set must be clearly presented and unambiguous. We have seen several instances where the rules have been open to alternative forms of interpretation; or some of the conditions set down in the EMI rules have created traps which convert a tax favoured arrangement into a non-favoured one.
Share schemes must be reviewed regularly
Share schemes need to be reviewed on a regular basis to make sure that they comply with changes in law and HMRC practice. For example, with the change from paper to online filing of EMI returns, the company must find a new basis on which the employee declares that they are a ‘full-time’ employee to meet the full time working condition imposed under the EMI rules.
Update in HMRC practice
Relatively recently, and without much fanfare, HMRC updated their policy and practice in another area. HMRC require that any restrictions attaching to the EMI option shares must be specifically identified in the EMI option agreement itself. It is no longer sufficient to simply incorporate these restrictions by making reference to another document.
Companies who already run EMI schemes or are proposing to grant new options should review and update their existing EMI documentation to capture this updated HMRC practice and to ensure that their schemes comply as tax favoured arrangements.