HMRC’s recently published guidance on the exercise of discretion re: EMI Options

November 22, 2022

HMRC has recently updated their guidance in the HMRC manuals at ETASSUM54300 on their views about what would and would not constitute acceptable exercise of discretion in the context of EMI Options.


Paragraph 37 of Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 provides that the terms of any EMI Option must be stated in a written EMI Option agreement. While some of the terms such as the date of grant, number of shares, exercise price, when and how the option may be exercised, are fundamental terms, other conditions, such as performance conditions, affect the terms or extent of the employee’s entitlement.

Based on case law, HMRC takes the view that more than de-minimis amendments to the fundamental terms of an option agreement result in the release and re-grant of an option. In HMRC’s view, any amendment that stems from the use of a discretion clause in an EMI Option agreement must also adhere to the same principles.

However, there were no specific guidelines and hence it was not clear as to what would constitute acceptable or unacceptable exercise of discretion so as to determine whether or not there has been a breach of the fundamental terms of an EMI Option.

Key principles

In HMRC’s view, the key principles relating to the exercise of discretion are as follows:

  • If, from the outset, it is clear as to when and in what circumstances an EMI Option is capable of exercise, the exercise of discretion to accelerate the vesting or to vary or waive a performance-related condition should not be a fundamental change, provided that such exercise of discretion does not bring forward the date of exercise of the EMI Option
  • The variation or waiver of performance-related conditions for the vesting of an EMI Option on a fair and reasonable basis and in appropriate circumstances following the grant of an option should be acceptable
  • Complete discretion to choose the circumstances under which an EMI Option may be exercised is unacceptable
  • It is not acceptable to amend an EMI Option agreement or rules or use discretion to create a new right of exercise, introduce a discretion clause where none existed before or to change the date of exercise, unless de minimis.

Specified events and time-based events – use of discretion

Two common types of EMI Options are those that are exercised based on (i) specified events, for example, exit only options, and (ii) time elapsed, for example, time-based options.

  • Discretionary changes to the timetable for vesting of an exit only option will typically not amount to a change to the fundamental terms of the option
  • Discretionary changes to the timetable for vesting of time-based option is likely to be a change to the fundamental terms of the option
  • In respect of an option where the exercise is contingent upon the option having vested in full, a discretionary change to the timetable for vesting which does not change the date on which the last of the shares subject to the option may vest, should usually be acceptable
  • In respect of an option that can be exercised immediately following vesting, any change to when the option vests would not be an acceptable change
  • In respect of time-based options that are exercisable on specified events, the exercise of a board discretion to allow the exercise of an option to a greater extent than vested should be acceptable.

Cessation of employment

  • The exercise of discretion to determine whether a person falls within the definition of a ‘good leaver’ should be acceptable.

Other guidance

  • A discretion clause in the Option agreement does not in itself disqualify an EMI Option (as long as it does not undermine the requirements of paragraph 37(2) of Schedule 5), it is the use of the discretion that determines the status of the option
  • The inclusion of a discretion clause following grant may be acceptable as long as the change as to when and how the option may be exercised is more that de minimis.


HMRC has provided some useful examples of acceptable and unacceptable use of discretion in the HMRC manuals at ETASSUM54350-54360).

Our Comments

HMRC has provided some helpful, updated guidance on what constitutes acceptable and unacceptable exercise of discretion in the context of the EMI Options. While the guidance does not cover all circumstances, it appears to us that HMRC makes a distinction between ‘when’ an EMI Option can be exercised and the ‘extent’ to which it may be exercised. The use of discretion to bring forward the timing of exercise would generally be regarded as a fundamental change and therefore unacceptable, whereas the use of discretion to determine the extent to which an EMI Option is exercisable should be acceptable, as long as it does not alter the timing of exercise. The updated guidance should assist share scheme practitioners going forward with both the drafting of the EMI plan rules as well as advising clients on the exercise of discretion.

For more information, please contact JD Ghosh, Stuart James, Nigel Mills or Paul Norris.

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