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EMI Update: HMRC Confirms Tax Advantaged Status of EMI Options

06 November 2018

HMRC, in its ERS Bulletin 30, has confirmed that all EMI options granted during the period between 7 April and 15 May will benefit from the tax advantages offered by EMI.

However, if the company that granted the options during the above period subsequently decides to cancel such options in order to grant fresh EMI options to their employees, HMRC will waive the three year limit (i.e. on the amount of EMI options that may be granted) for such options.

You may remember that the UK’s state aid approval for EMI expired on 6 April 2018. Two days before the expiry, the Revenue cautioned companies and share incentives advisers that any EMI options granted after the deadline and before any approval was subsequently received from the EU could be treated as non-tax advantaged options. HMRC then suggested that companies may wish to hold off granting EMI options until such time as state aid approval was received.

It was therefore good news when on 15 May 2018, HMRC announced that the European Commission had approved a prolongation of its state aid approval for EMI until the UK formally leaves the EU subject to any exit agreement.

What does this mean?

Generally, for companies that granted EMI options during the relevant period, you do not have to do anything as HMRC will consider those options to be qualifying EMI options (provided the options have been notified to HMRC).

However, due to the suddenness of HMRC’s 4 April announcement and the uncertainty that followed, some companies may either have altered their EMI plan rules or the number of shares over which the EMI options were granted in order to provide safeguards for a situation where the UK would be unable to receive state aid approval.

For such companies, you may benefit from reviewing the rules of your existing EMI plan and if necessary, cancelling the existing EMI options and then granting fresh EMI options under terms that properly reflect your initial intentions for making the awards in the first place.

Please note that HMRC will not backdate any new EMI options and the effective date of grant will be the date on which the new EMI options are granted and not the date on which the cancelled options were granted. This is particularly relevant in light of proposed changes to the legislation on Entrepreneur’s Relief which will, for disposals made after 6 April 2019, require employees to have held their EMI options for at least two years in order to qualify for Entrepreneur’s Relief.

Pett, Franklin & Co. LLP are experts in employee share schemesexecutive incentives and share valuations. To find out more about we how we can help you or your client, please contact Charlotte Fleck at charlotte.fleck@pettfranklin.com or call 0121 348 7878.

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