The EMI hiatus conundrum – To grant, or not to grant? – that is the question…

Wed 11 Apr 2018

Further to our previous EMI blog, in March, (here: https://blogs.mazars.com/letstalktax/2018/03/emis-eu-state-aid-renewal-deadline-is-looming-fast-emi-plan-house-keeping-matters-to-check/ ) warning that HM Treasury had failed to secure timely renewal of the EU State Aid approval necessary to allow Enterprise Management Incentive (EMI) tax advantaged option grants to be made after 6 April 2018, the deadline has indeed passed without the requisite renewal confirmed.

So, where does this leave businesses now?

What we now know:

From HMRC’s Employment-Related Securities Bulletin issue 27 we now know the following:

•  EMI options granted on or before 6 April 2018 remain unaffected as HMRC regard the prior EU State Aid approval to apply to grants. This is good news and means, provided there is no disqualifying event, the anticipated tax advantages for these awards (both at exercise and ultimate sale of the shares) continue;
•  Options purported to be granted under EMI from 7 April 2018 onwards will currently be treated as non-tax-advantaged options; and
•  HM Treasury are continuing to seek EU State Aid approval renewal for EMI but a timeframe for concluding negotiations is not yet clear.

The unanswered questions:

The further clarification still sought from HMRC includes:

• Will HMRC Small Companies Enterprise Centre (SCEC) continue to review and consider EMI advance assurance requests in the interim or will officers be asked to hold these in a backlog pile?  – While there is no statutory obligation to obtain HMRC approval or confirmation of an EMI scheme, it is possible to apply for advance assurance that the company is a qualifying company for the purpose of EMI.  Advance assurance can therefore be a helpful risk management mechanism for a company before it communicates with its employees about the scheme.  In view of the current uncertainty companies need to take a view on whether to continue to make applications (to at least obtain and hold a place in the queue), or sit and wait to see if the EU impose any eligibility condition changes as part of the (anticipated) renewal which might impact any such application.
• Will HMRC Shares and Assets Valuation (SAV) continue to review and consider EMI share valuation requests for prospective grants in the interim or will officers be asked to hold these in abeyance? – HMRC SAV will need to consider valuation requests made in respect of grants made prior to 6 April 2018 but it remains to be seen if they will currently consider valuations for prospective grants or take a more lenient view on their valuation extension policy for those who have a valuation agreed but did not manage to complete the grant before 6 April 2018. Companies need to take a view on whether to continue to make applications (to at least obtain and hold a place in the queue) or sit and wait to see if the EU impose any new eligibility conditions which might make any such application redundant.
• Will any future renewal apply retrospectively? – This is not known. However, the EU has previously retrospectively ratified the EU State Aid EMI position and so those with a higher risk tolerance may choose continue to grant options in the hope that retrospective relief is granted and they are on the front foot with incentive awards. The downside risk of course is that if approval is not obtained, or not effective from 7 April 2018 or there is a change in eligibility conditions imposed which means the grant is otherwise non-qualifying, then unwelcome tax consequences flow. Ensuring tightly worded tax indemnity clauses and secondary National Insurance contribution transfer agreement provisions will be key commercial protections to have in place (as always) to manage the employer’s tax risk.

Those who choose to carry on granting regardless also need to bear in mind:

• Renunciation of options needs bilateral agreement, i.e. the grantor cannot unilaterally renounce the options. Is it necessary/prudent to therefore build in an automatic lapse in the event that EU State Aid renewal is refused or not effective retrospectively? It could be tricky to determine how long to set for the wait and see period for any such ‘break clause’.
• If the issuing company is not to be the grantor but the option is instead granted by a third party (an existing shareholder or an employee benefit trust for example) then the Part 7A ITEPA 2003 ‘disguised remuneration’ legislation needs to be considered and there may be an unintended early PAYE charge as the statutory exemption for EMI could not apply.
• When are the (post 6 April 2018 granted) option vesting conditions likely to be satisfied? If an immediate or imminent exercise is likely then the resulting shares might not be relevant EMI shares for capital gains tax purposes. A claw-back of issued shares to ‘start over’ with a new grant and exercise is likely to be administratively awkward to say the least…

This is a tricky and uncertain landscape to navigate currently and the best advisers can do is to inform businesses about the possible choices and potential consequences of taking or not taking any particular course of action.

Those who can wait for a while at leisure and grant when the EU approval position becomes clearer have the benefit of certainty but those who need to provide incentives on a time critical basis face tougher decisions. Should the company gamble on EU approval being obtained soon and effective seamlessly (backdated effect) from 7 April 2018 and with no change to eligibility conditions, or redesign the award method using an alternative arrangement? Any alternative planning may involve other considerations and some form of design and tax compromise.

Please do get in touch if you wish to understand the alternative choices and let’s hope we get some further clarity from HM Treasury soon.

Meanwhile, for once, those companies ineligible for EMI may have the upper hand in the equity incentive award stakes.  Larger employers thinking about all-employee awards may wish to consider the benefits of a SIP plan – one commercial driver for this might be to help offset the impact of increased pension auto-enrolment costs. We have a blog about that too, here:  https://blogs.mazars.com/letstalktax/2016/01/auto-enrolment-the-key-question-for-fds-how-to-fund-it-and-still-contain-payroll-costs-is-a-share-incentive-plan-a-solution/

For further information contact: Liz.Hunter@mazars.co.uk