On 4 April HMRC announced that EU State Aid had not been renewed for the EMI share scheme, which means that no EMI share options issued from 7 April 2018 onwards will qualify for tax relief.
Why has this happened?
This does not bode well for the UK’s attempts to leave the EU smoothly. Compared with the administrative nightmare of changing most of this country’s legislation, the need to renew EU State Aid approval for the EMI scheme would be a mere drop in the ocean.
Bizarrely, we are informed by Employment-related securities bulletin No 27 (April 2018) that our legislators have failed to complete this relatively simple task by the deadline of 6 April 2018, on which the old approval expires. The consequences are quite devastating, as I explain below.
The fact that nobody in government saw fit to inform tax advisers or employers of this fact until two days before the deadline that is going to be missed must be regarded as at best worrying, and at worst astonishing (I am being charitable).
Existing share options
While HMRC considers that the State Aid approval continues to apply to options granted up to and including that deadline, ie 6 April 2018, it does not use a categorical statement to confirm this fact. In reality, one imagines that the department’s analysis is correct, but somebody behind the scenes at the Treasury must have been sweating a lot and making numerous calls to their friends in Brussels over the last couple of days.
What seems to be far clearer is that any EMI share options granted from 7 April 2018 onwards will not immediately be eligible for any of the generous tax advantages, which are the underlying justifications for companies to use this popular share scheme arrangement in the first place.
The government presumably hopes that, in the fullness of time, it will manage to negotiate a renewal of State Aid, together with a backdating to 6 April 2018 that would cover all options granted during this embarrassing lacuna. However, they do not currently seem to have as much confidence in their own abilities to negotiate with the powers that be in Europe as we might all expect. One must inevitably ponder whether there could be a message here about what might happen in other negotiations between the two parties over the next few years?
What should companies do now?
As a result of what is effectively a change to UK legislation, HMRC is recommending that: “Companies may wish to consider delaying the grant of employee share options intended to qualify as EMI options until fresh EU State Aid approval has been given.” It appears to be confident that such approval will be received at some point in the future but is completely silent with regard to timing other than promising an update at some indeterminate future point.
There are a number of considerations that tax advisers and companies which operate EMI schemes will need to bring to the table over the coming weeks and months.
- They may have concerns about whether options granted up to and including 6 April 2018 might be threatened with the consequence that they become what are commonly known as unapproved options overnight. If that is the case, then employees exercising options could find themselves facing substantial income tax and NIC charges that were not anticipated.
- Going a step further, companies may need to apply PAYE and NIC to such gains on a protective basis.
- Given the fact that this announcement was made at the last minute without receiving great prominence in the media, many potentially invalid share options may be granted in the interim period when State Aid approval has not been obtained. There has to be a reasonable possibility that these will never qualify for tax relief. Points 1 and 2 above will once again apply.
- It may be necessary to implement specific legislation to permit the re-granting of options from this dead period once approval has been obtained, if such action is even permissible.
- This of itself could cause hardship to some option holders. It seems unlikely that HMRC or the Treasury would wish to implement new provisions to permit the granting of options based on a backdated market value, particularly where there has been an increase in value, which might be very substantial for example where a company floats between the original date of grant and the new one. If that is the case, then those caught in this trap will face considerably higher tax liabilities as a direct consequence of the temporary lapse in the application of the legislation.
- There could also be issues for those who leave employment and would have had the opportunity to exercise the original share options tax-free had this issue never arisen.
- In addition to the poor, beleaguered employees who may suffer as a result of this failure, one must also presume that companies will not be entitled to the beneficial corporation tax relief rules that apply to the cost of valid EMI share options.
Without wishing to be unkind to whoever was responsible for what is an unmitigated disaster for all involved, I hope that solutions to all of these problems (and many more that will undoubtedly arise) can be expedited, so that this whole sorry saga can become a brief footnote to tax history rather than the cause of great hardship for increasing numbers of its victims.