State Aid Approval of EMI Share Options
Since it began in 2000 the UK’s Enterprise Management Incentive (EMI) share option scheme has been one of the most popular employee share schemes introduced. Thousands of smaller companies in the UK have set up EMI schemes with many tens of thousands of key employees receiving EMI share options.
Smaller and early stage companies are often cash constrained and less able to pay salaries than larger organisations, and the generous use of share options allows these companies to compete with larger organisations for hiring and retaining key staff.
Gains from non-tax favoured share options are taxed as Income tax and subject to Income tax and National Insurance at the individual’s marginal rate via PAYE. The gain on EMI options is normally only taxed under the capital gains tax rules where the tax rates are much lower than for Income and payable later under self-assessment.
In addition, the gains on the sale of EMI shares now usually qualify to pay tax at the Entrepreneurs Relief rate of 10%, and companies can usually claim corporation tax relief on the value of the share options after they have been exercised.
As the tax benefits afforded by EMI are only available to companies with certain qualifying business activities, they involve the provision of state aid. Under EU rules, state aid is unlawful unless it falls within an applicable exemption or if it is seen as compatible with treaty provisions. The EMI regime was approved by the European Commission in a decision on 9 July 2009. The exemption lapsed on 6 April 2018.
It therefore came as a shock to many, including HMRC, when the government announced only two days before the exemption expired that a continuation after 6 April had not been obtained.
Furthermore, the government offered no assurance that awards made after 6 April would be valid EMI options and in fact suggested companies might wish to delay granting options until the position was clear. Companies and their advisers were effectively left to work things out for themselves.
Fortunately, in early May, the EU swiftly agreed to a continuation of the exemption until the UK leaves the EU. Despite the casualness over the State Aid issue, EMI has been one of the policy successes of government.
The new approval runs until 6 April 2023, but it will be subject to the terms of the Brexit withdrawal agreement in due course.