EMI hiatus – no agreement yet between HMRC and EU on State Aid approval

MI reliefs rely on State Aid approval from the EU.  HMRC has just announced – in what must be a source of considerable embarrassment – that it has not yet been able to renew State Aid approval for EMI options.   Therefore, options granted after 6 April 2018 may not qualify for EMI purposes (even if they would otherwise have qualified if granted the day before).

We will need to wait for HMRC to renew EU State Aid approval to be sure that EMI options granted after 6 April 2018 will actually benefit from the EMI tax reliefs.  Query whether, in providing any new approval, the EU will grandfather the approval that is about to lapse so that it covers the interim period between 6 April 2018 and the date of any new approval – worst case scenario, options granted during that interim period will not be EMI qualifying.

This is an important point for both companies at the point of granting options and also acquirers (and their advisors conducting due diligence) when acquiring those companies in the future.

According to the HMRC web site:

“EU State Aid approval for the EMI scheme, expires on 6 April 2018. The government has, since last year, been following the process of applying to the European Commission for fresh approval and we await the Commission’s final response. We won’t receive this before 6 April 2018 and so those involved in the establishment of EMI schemes and grant of EMI share options need to be aware that there will be a period between the lapse of the existing approval on 6 April and a decision by the EU Commission on a fresh approval. The government is working hard to ensure this period is as short as possible.

HMRC considers that the State Aid approval applies to the granting of share options and therefore that share options granted up to and including 6 April 2018 won’t be affected by this lapse of the approval.

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.

Companies may wish to consider delaying the grant of employee share options intended to qualify as EMI share options until fresh EU State Aid approval has been given.”

STOP PRESS: HMRC UPDATE 6th APRIL 2018

HMRC has released a bulletin confirming that it has not been able to secure continued EU State Aid approval for EMI option plans before the current approval expires on 6th April 2018.  This is a ten year approval which everyone just assumed would be given.

HMRC’s view is that this means that EMI options granted on or after 6 April 2017 and before EU State Aid approval is received “may not be eligible for tax advantages” and so may be taxed as an unapproved option.

HMRC have further stated that, in their view, EU State Aid approval applies solely to the granting of options and therefore EMI options granted up to and including 6th April 2018 should not be affected.

However, the European Commission may disagree with this analysis and there is a risk that (1) options granted on or after 6 April but before the State Aid approval may be given will not be protected retrospectively and (2) options granted before 6 April may not be protected at all if exercised prior to State Aid approval being given.

The text of the current State Aid approval states that the period of the approval applies in respect of EMI option exercises rather than grants.

A strict interpretation of the approval text would mean that all EMI option exercises will be non-tax advantaged during the gap in approval, no matter when they were granted.

We strongly recommend that companies with EMI option plans should consider delaying further EMI option grants until after EU State Aid approval is given.  Also, for the time being, it would be preferable, if possible, for EMI options not to be exercised!  HMRC have emphasised that the Government is working hard to ensure this period is as short as possible. 

We will circulate an update in due course.

If you want to discuss this or any other issues relating to EMI options and other forms of management incentive arrangements then please do get in touch at jeremy@humphreys.law.

Humphreys Law