Enterprise management incentives (EMI) is a very popular ‘tax-advantaged’ share options scheme introduced by Finance Act 2000 that allowed smaller companies to make tax-advantaged awards of share options enabling their employees to share in the growth of the business.
EU state aid approval ran out for these plans on 6 April 2018 which means that it is questionable whether new awards will still benefit from the tax advantages. Existing awards are not impacted at this time. Generally we are advising clients to hold off making new EMI awards at this time, but please see below for further details if this impacts you.
Designed to help smaller companies with growth potential to recruit and retain the best employees, EMI has for many years proved a popular way for employers to incentivise their staff.
Unlike other types of tax-advantaged employee share schemes, EMI options involve the provision of state aid by the UK to companies granting them. This is because the benefits of EMI options are restricted to companies with certain business activities. State aid is generally unlawful under the EU treaties, unless it falls within certain exceptions or has been reviewed, in advance of implementation, by the European Commission and found to be compatible with the relevant treaty provisions. EMI options were approved by the Commission in a decision issued on 9 July 2009.
A major reason for the scheme’s popularity was the generous tax reliefs available. The increase in share value between the date of grant and date of exercise (the ‘gain’) was generally subject to capital gains tax (CGT) and there was enhanced access to additional tax reliefs, meaning that gains on EMI options were often subject to a tax rate of just 10%. As well as the tax advantages, the flexibility that could be built into the plan meant it was often the ‘go to’ share option scheme for companies who met the qualifying criteria.
Note the deliberate use of the words ‘was’ and ‘were’ – on 4 April 2018, HMRC made an eleventh hour announcement, confirming that existing state aid approval for EMI schemes in the UK would expire at 23:00 UK time on 6 April 2018 and that no new approval had been obtained. Although it has been requested by the UK, this remains the situation, and it is not currently known when (or if) it will be re-granted.
For employers, this means that if a share option scheme designed to be EMI-qualifying is established after this time, options granted under it cannot be guaranteed to result in the intended tax advantages, and may only do so in the event that:
(a) fresh EU state aid approval is granted, and
(b) such approval is backdated to 6 April 2018.
Even if fresh approval is obtained and backdated, it is possible that the qualifying criteria may be changed with retrospective effect. The implication of this is that awards granted in the interim would only be EMI-qualifying if the scheme met the new, backdated conditions.
If you established an EMI scheme before 23:01 on 6 April 2018, then you will be relieved to learn that options granted before this time will remain EMI-qualifying, even if they have not yet been exercised. However, if you are intending to grant new options under your existing plan, then you are essentially in the same position as a company setting up a scheme post-6 April – until state aid approval is reacquired, these options will be treated as ‘non-tax advantaged’. In contrast to EMI, gains made under non-tax advantaged option schemes are treated as employment income and taxed at up to 45%, as well as potentially being subject to employers’ and employees’ national insurance contributions. As the EMI scheme allows options to be granted over shares worth up to £250,000 (valued at the date of grant) to a single individual, the potential additional tax on the employee is significant.
So, if you are considering putting a share scheme in place, or if you already have an EMI scheme, please get in touch with one of our experts. Whilst this news will be unwelcome to many, there are alternative arrangements that can be put in place. We have the expertise to help you understand the implications of this change and help find a solution for your business.