Mackrell Turner Garrett warn investors about changes to EMI tax relief

A solicitor at London full-service law firm, Mackrell Turner Garrett, has said that the European Commission not renewing the UK’s EMI (Enterprise Management Incentive) share option schemes leaves an air of uncertainty for companies.

Last year the Government announced that it was following the process of applying to the European Commission for fresh approval on EMI share option schemes to ensure they continued to receive their tax advantage via the State Aid arrangements. The deadline for the approval was 6 April 2018.

Adam Forder
Adam Forder

However, the Government has confirmed that the European Commission’s final response is still awaited, and therefore there will be a period where approval lapses from 7 April 2018. The Government has stated that it is working hard to ensure that the lapsed period is as short as possible.

Reflecting on the European Commission’s failure to provide a final response by the 6 April 2018, Adam Forder, a Solicitor at Mackrell Turner Garrett said: “In recent years EMI share options have become a popular way for companies to remunerate and incentivise staff in a tax efficient manner.

“Companies have used EMI schemes to grant options to reward selected employees by allowing them to acquire shares over a prescribed period and then sell them at later date if they wish, as long as they follow set criteria.”

Adam explained that EMI schemes allowed for no tax charge on the exercise of an EMI option providing it was granted at market value and no charge on income tax if the company’s share price had increased in value between the time of grant and exercise.

“Instead employees may take advantage of Entrepreneur’s Relief and when they sell their shares are charged Capital Gains Tax (CGT) at either 10 per cent or 20 per cent (depending on their tax rate) on the gain in value of the shares from the market value at the date of the grant of the option. This is far less than they might be taxed under income tax from a salary.” added Adam.

“The current landscape is certainly not satisfactory, given the current lapse of approval along with the Government providing only a few days’ notice that approval was not going to be provided in time. Comfort may be taken that those share options granted up to the 6 April 2018 will maintain their tax advantages.

“It may be the case that approval is backdated to 7 April 2018 to cover off the lapse period, but companies should be cautious as options approved during this period may not benefit from the current tax advantages and therefore would be subject to income tax on exercise.”

Whilst companies await a further update from the Government on the position, they may wish to delay the grant of options intended to qualify for EMI until the EU provides State Aid approval, added Adam. At this point in time it is not known how long this period will last, but Mackrell Turner Garrett will release further details as soon as the Government confirms this.