A summary of the latest updates from HMRC for companies operating Enterprise Management Incentive (EMI) option schemes

Reminder: Reduced HMRC valuation window for EMI option grants

Employers operating Enterprise Management Incentive (EMI) option schemes for their employees should be aware that HMRC has removed its concession under which it has been allowing companies an extended period to make EMI option grants in reliance of their valuation agreement with HMRC.

HMRC has in recent times been allowing companies 120 days from the date of HMRC’s valuation acceptance letter to make their EMI option grants, extended from 90 days in 2020 in recognition that the Covid-19 pandemic may result in delays to grants.

HMRC confirmed in its ERS Bulletin 44 that any valuation agreement letter issued from 1 December 2022 will permit the company only 90 days to make the EMI option grants, in the same way as before the Covid-19 pandemic. 

Companies should also be aware that, as has always been the case, HMRC’s valuation agreement is subject to the proviso that there are no changes prior to the granting of the options that could affect the accepted value, such as (for example):

  • any change (completed or actively contemplated) in the share or loan capital of the company; 
  • any arms-length transactions (completed or actively contemplated) involving shares of the company; 
  • negotiations or preparations for a flotation or takeover;
  • any declaration of a dividend on any class of shares in the company; or
  • the publication by the company of any new financial information, for example, the annual accounts or interim results or announcement.

HMRC’s approach to discretion in EMI option agreements

HMRC also published long-awaited updates to its technical guidance on the use of discretion clauses in EMI option contracts in October 2022.

There has for some time been uncertainty as to when HMRC would consider the use of a discretion which changes the way in which an EMI option works to be such a fundamental change that it effectively results in the grant of a new (non-qualifying) option.  Prompted by clearance requests, the new guidance provides some clarifications around where HMRC can be expected to draw the line. 

The guidance contains some example scenarios and draws a distinction between discretions which affect the extent of vesting and those which affect the timing of exercise.  Amongst other clarifications, HMRC confirms that it would consider the use of a discretion which changes the time when an option may be exercised to result in a re-grant, where the discretion being relied on is general in nature and not expressly linked to a specified event or milestone.

HMRC have also confirmed that, where companies have in the past received direction from HMRC that is believed to be out of line with the new guidance and resulted in a deduction of income tax and NICs, they can contact HMRC by email at shareschemes@hmrc.gov.uk and follow the instructions contained in its ERS Bulleting 46.

The guidance is welcomed by advisers and companies, but there are nuances in its application and there will be cases where uncertainty will remain and professional advice will be necessary – for example, where companies are considering changes to a vesting schedule for an option that is exercisable as soon as it vests, or where the interpretation of a discretion is unclear.

In any event, companies are recommended to seek professional advice before operating any discretion in EMI option documents or making any amendment to EMI options, and before using template grant documents in order to ensure they are in line with HMRC’s practice and the legislation governing qualifying EMI options.

If you would like to speak with a member of our team about your employee share incentives, please contact Kathy Granby or Matthew Rowbotham.