EMI’s EU State Aid renewal deadline is looming fast – EMI Plan ‘house-keeping’ matters to check

Sat 17 Mar 2018

Enterprise Management Incentives (EMI) is the UK’s most popular share plan, offering great flexibility and tax advantages for eligible entrepreneurial businesses.

The tax relief advantages for EMI include the potential to exercise options tax-free (provided the exercise price is at least equal to market value as agreed with HMRC as at date of grant) and to realise capital gains with the tax advantages of entrepreneurs’ relief on more relaxed terms.

EMI enables companies to grant options over shares (which can be non-voting if desired) and, provided the eligibility criteria continue to be met and the shares are sold more than a year after the option was granted, gains realised (surplus to any available annual exemption) will be taxed at just 10%, even if the option is only exercised on the day of sale and even if the individual holds less than 5% of the company’s ordinary voting share capital.

However, the highly attractive tax advantages of EMI are dependent on EU State Aid approval. This is due to expire on 6 April 2018.

Amongst the 2017 Spring Statement press releases from HM Treasury was a commitment to seek timely renewal of this EU State Aid approval. Sadly it seems other things (the small matter of Brexit perhaps) have led to a very delayed application to the EU Commission for renewal of this highly prized incentive tax relief.

We had been expecting, a year later, that the Chancellor would announce in his 2018 Spring Statement that such EU renewed approval had been obtained. There was however a very notable silence.

HM Treasury assure us that negotiations have been underway for a while and that a Commission decision is expected “soon”. Let’s hope we hear some positive news in the coming days…

If EU State Aid approval is not confirmed prior to 6 April 2018 then EMI options will lose their tax advantages with effect from that date, until such time as EU State Aid approval is obtained or, worst case scenario, the UK is able to legislate without EU approval post-Brexit (i.e. some time after 29 March 2019.)

What contingency action should a company with an EMI plan in place now consider?

State Aid renewal lapse is not an appealing scenario to contemplate, however as time is now marching on we feel the need to consider some contingency actions.

We anticipate that failure to obtain timely EU State Aid renewal would result in existing EMI options being treated as tax-advantaged up to and including 5 April 2018 and that gains accruing after that date would be treated as non-tax-advantaged option gains (i.e. similar to the pro-rating treatment that applies under the existing EMI disqualifying events provisions.)

Prudent (or sceptical!) planners may therefore meanwhile wish to consider checking:

•  which EMI options are already vested and capable of exercise pre 6 April 2018; (such option holders may wish to exercise on 5 April 2018 to preserve all existing tax benefits)
•  whether the terms of EMI option agreements already permit an ability for the Board to allow a discretionary acceleration of vesting; (i.e. to enable an earlier exercise. Note that if no existing provisions allow this then any variation of such material option terms would typically result in the revised option being treated as a new option. Such variation would not generally be desirable in relation to valuation and entrepreneurs’ relief considerations). Other matters to check before ‘pressing the button’ on an acceleration of vesting would be whether the equity issuing company’s Articles of Association provide the desired commercial protections in this new scenario (i.e. in relation to compulsory transfer of shares on cessation of employment, voting and dividend entitlement. Many such considerations are not built in where companies implement EMI on a low-budget and/or exit-only basis.)
•  if an exercise is likely, do you have the required documents needed for this? i.e. Notice of Exercise, s 431 ITEPA 2003 election and, if relevant, Deed of Adherence to Shareholders’ Agreement.
•  whether a joint NIC election is in place or whether the plan rules and option agreement provide for secondary National Insurance contribution (NIC) transfer agreement; (i.e. to ensure that the employer company does not have a contingent NIC liability post 5 April 2018 if EU State Aid renewal is not obtained.)
•  whether the EMI plan rules and agreement contain sufficiently robust tax indemnity wording to ensure that the employer company does not have any tax and/or NIC liability in the event that the EMI option becomes non-tax-advantaged.

Even if, as we do sincerely hope, HM Treasury come up with the goods in time and EU State Aid renewal approval is obtained pre 6 April 2018, there is always a chance that some of the eligibility criteria for EMI may be tweaked. We can perhaps look to the newly launched Irish Key Employee Engagement Programme (KEEP) in this regard, which is subject to EU State Aid approval granted towards the end of 2017.

For now, we await HM Treasury’s pronouncement and stand ready to assist those businesses with EMI plans who wish to ensure they are future-proofed, as far as possible, to navigate the landscape ahead.

For further support and assistance contact Liz Hunter, Head of Share Schemes email: Liz.Hunter@mazars.co.uk