Our Incentives team consider the news that tax reliefs for EMI options granted on or after 7 April 2018 may be withdrawn due to the failure to renew EU state aid approval of EMI

Why do EMI options require EU State Aid approval?

HM Treasury has failed to secure the renewal of EU State Aid approval necessary under EU law to enable EMI options granted after 6 April 2018 to continue to benefit from tax advantages. EMI requires EU State Aid approval as, unlike the other HMRC tax-advantaged plans, EMI options can only be granted by companies with certain business activities which means they are caught by the State Aid rules. State Aid is generally unlawful under the EU treaties, unless it clearly falls within a specific exception. Where State Aid approval is given by the EU, it is time limited and must be renewed from time-to-time.

Whilst HM Treasury still appears optimistic that EU State Aid approval will be given in due course (although no revised timetable for this is forthcoming), it is unclear whether it will be retrospective in respect of options granted from 7 April 2018 and/or whether it will be subject to amendments to the current EMI legislation.

How does this affect EMI options granted on or before 6 April 2018?

This failure to secure renewal of the State Aid approval does not affect EMI options granted on or before 6 April 2018 as HMRC considers that the State Aid approval applies to the granting (and not the exercise) of share options.

How does this affect EMI options granted on or after 7 April 2018?

HMRC's view is that "EMI share options granted in the period from 7 April 2018 until EU State Aid approval is received may not be eligible for the tax advantages presently afforded to option holders, and accordingly share options granted in that period as EMI share options may necessarily fall to be treated as non-tax advantaged employment-related securities options".

What should companies do now?

HMRC is encouraging companies to delay granting new EMI options until the EU reaches a decision on renewing State Aid approval. However, this may not be feasible:

• where a company is expecting that the value of its shares is likely to increase significantly in the next few months. In that case it may prefer to grant EMI options while they may still be able to agree a lower actual market value of the option shares with HMRC and take the risk that they may ultimately prove to be taxed as non-tax advantaged options. HMRC has confirmed that its Shares and Assets Valuation Division will continue to approve share valuations for EMI purposes on a "business as usual basis"; and
• where a company expects that it will no longer qualify for EMI purposes in the coming months. For example, this may be where the workforce is likely to increase to 250 or more full-time employees or the gross assets limit of £30 million is likely to be exceeded. Again, the company may want to take the risk that they may ultimately prove to be taxed as non-tax advantaged options.

If EMI options are granted before the renewed EU State Aid approval is obtained, it may be prudent to include a clause in the new EMI documentation which permits amendments to the EMI share option if and once the approval is obtained. In addition, option holders entering into an EMI agreement during this time should be made aware of the current uncertainty around the tax treatment and the risk that the option may ultimately be taxed as a non-tax advantaged option.

If you have any questions on the issues raised in this article please contact Nicky Griffin or your usual AG contact.