The UK Government has announced, at very short notice, that continued EU approval of the tax approved status of Enterprise Management Incentive (“EMI”) options has not been received before the current approval runs out on 6 April 2018.
What this means is that EMI options granted on or after 7 April 2018 and before the EU approves the tax approved status of EMI options for State Aid purposes will not receive the beneficial tax status and will be treated as “unapproved” for tax purposes.
Any company intending to grant EMI options should ensure that all the option agreements are signed and completed by midnight on Friday 6 April 2018.
EMI options benefit from a highly efficient tax regime as no tax is payable on the grant of the options and, provided all the relevant conditions are satisfied, any increase in value of the shares is only subject to capital gains tax when the shares are sold with the tax rate being as low as 10% (compared to a top rate of income tax of 45%). More information on the benefits and conditions for EMI options can be found here.
The tax benefit does require approval from the EU under the State Aid rules to ensure that no EU country can give its economy an unfair advantage. The current EU State Aid approval for the grant of EMI options runs out on 6 April 2018. Without new State Aid approval any EMI options granted on or after 7 April 2018 will be treated as “unapproved” for tax purposes. This means that any increase in value of the shares will be subject to income tax at up to 45% (and possibly National Insurance Contributions) at the time of exercise of the option.
Any company that has not granted EMI options by the 6 April 2018 deadline should hold off granting new EMI options until after the EU State Aid approval has been received. There is nothing in the Government announcement to suggest that EMI options granted in the period between 7 April 2018 and the receipt of EU State Aid approval will receive retrospective tax approved status.
Will Brexit make a difference?
The continued operation of State Aid approval and the rules on whether the UK government can grant benefits to favour businesses within the UK compared to businesses in the EU will depend on the transitional agreement negotiated as part of the UK leaving the EU on 29 March 2019. We will have to wait and see whether the tax approved status of EMI options falls within the definition of “taking back control” !
The Government announcement relating to the EMI options can be found here. For further questions on the grant of EMI options, please contact Andrew Evans