Tax

On 6 April 2018, the EU State Aid approval which is critical to the operation of Enterprise Management Incentive (“EMI”) options expired.  Two days beforehand, HMRC published Issue 27 of its Employment Related Securities Bulletin, setting out information regarding the implications.

Due to the limited availability of the regime, the tax reliefs arising in respect of EMI options constitute a form of state aid to the companies that are able to grant the options.  All the while the UK remains a member of the EU (so, at least until 11pm on 29 March 2019), EU State Aid approval is critical to the operation of the regime.  EMI options were previously approved by the European Commission in 2009 but that approval has now expired (despite HMRC’s having applied for renewal of the approval last year).  This means that we are now entering a hiatus period in which EMI options are not covered by a current EU State Aid approval.

In Issue 27, HMRC confirms its view that the EU State Aid approval applies to the granting of EMI options.  Accordingly, EMI options granted on or before 6 April 2018 will not be affected by the expiry, and HMRC will continue to apply its current guidance and practice pertaining to the EMI regime in relation to such options.  However, it is currently unclear whether the European Commission would be prepared to provide a retrospective approval and, therefore, EMI options granted in the hiatus period may not be eligible for the tax advantages previously afforded even if, as is widely expected, approval is ultimately provided.  If this does turn out to be the case, such options would likely be treated in the same way as other non-tax advantaged employee share options.

More conservative readers may prefer, where possible, to look beyond HMRC’s comments, and seek to delay the exercise of options until the EU State Aid approval has been given.  In this regard, it is worth noting that the text of the EU State Aid approval from 2009 contains a short explanation that the notification covers the period ending on 6 April 2018 because that “is the period during which EMI share options can be exercised”.  However, taking HMRC’s comments at face value, companies should at least consider delaying the grant of any employee share options that are intended to qualify as EMI options until fresh EU State Aid approval has been given.  If there is a need to grant EMI options before the approval has been received (for example, due to concerns around fulfilling the various qualifying criteria in the future), consideration should be given to including terms allowing for the EMI options to be re-granted at a time when they will qualify for the tax reliefs.