Recent HMRC announcements relating to EMI options
HMRC recently made new announcements about tax-advantaged Enterprise Management Incentive (EMI) share options in its Employment Related Securities Bulletin 31 (21 March 2019) and in updated Share Valuations guidance (1 April 2019).
Errors in notification of EMI options to HMRC
When a company grants an EMI option, it must notify HMRC of the grant through the online reporting system within 92 days of the date of grant; otherwise the option will not qualify for tax exemptions.
If the company realises that it has made a mistake in its notification about the grant of EMI options, the consequences depend on the period which has elapsed since the date of grant.
• If it is still within 92 days of granting the options, the grants can be re-notified through the online system within that 92-day period. The originally notified options should then be cancelled on the next EMI annual return.
• After 92 days, but within nine months of the original grant date, provided it has a reasonable excuse for not re-notifying within the 92-day deadline, the company should notify HMRC of the facts. If HMRC accept the explanation, they will issue a “reasonable excuse code” which will allow the company to re-notify the corrected options through the online system. Again, the originally notified options must be cancelled on the next EMI annual return.
• After nine months of granting the EMI options, the legislation does not allow errors or omissions to be corrected. The company must notify HMRC of the error. If HMRC regard the error as material and that it may cause the options to fail to meet the legislative requirements, the options will remain in existence but will not benefit from the EMI tax exemptions.
Impact of IFRS 16 on a company’s gross assets
The tax advantages of EMI options are intended only for small companies. The EMI legislation therefore does not allow EMI options to be granted if the company’s gross assets (including the gross assets of its subsidiaries) exceed £30 million at the date the EMI options are granted. (The test does not need to be met at the time of exercise.)
HMRC has updated its guidance on the gross assets test to confirm that if a company uses international accounting standards, IFRS 16 will apply from January 2019 in determining the value of the company’s assets on its balance sheet.
Working time declarations by EMI option holders
At the time of grant of EMI options, the employees must sign written declarations that they spend at least 25 hours each week or, if less, 75% of their working time working as employees for the company or a qualifying subsidiary. Employees have to make new working time declarations for each new grant of EMI options.
HMRC have confirmed that the declaration must be made at the time of option grant and it cannot be backdated.
Restrictions on shares to be acquired through EMI options
The option agreements for EMI options should contain all the terms and conditions of the options and any restrictions on the shares to be acquired on exercise of the options.
HMRC have stated that where restrictions on shares have not been notified to option holders at the date of grant the company should seek to remedy this as soon as possible. HMRC’s advice should be sought as to whether any proposed retrospective action could result in the options losing their tax-advantaged status.
Valuation of shares for EMI options
Where shares to be acquired on exercise of EMI options are not listed on a recognised stock exchange, the value of the shares must be agreed by HMRC Shares & Assets Valuation (SAV) before the date of grant. This may be crucial in determining the taxable amount when the options are exercised.
In practice, where the shares are traded on AIM, SAV often agree to accept the quoted AIM price. However, the value for unquoted shares must be based on an accepted share valuation methodology.
HMRC have confirmed that agreed valuations will remain valid for 90 days. The previous limit was 60 days.
For further information contact Mike Landon