The Association of Taxation Technicians (ATT) is highlighting the difficulties caused by HMRC only warning employers two days in advance that a vital EU approval would no longer be in place in respect of an employee share option scheme.
On 4 April the Government announced that a new EU state aid approval would not be in place in respect of the Enterprise Management Incentive (EMI) share scheme by the time the previous approval lapsed on 6 April 2018.
Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said:
“The timing of HMRC’s announcement was very unhelpful, coming only two days before the existing state aid approval was due to expire. This will cause real problems for employers looking to grant EMI options, who will have to apply the brakes to their plans very quickly to ensure that their employees do not end up with an unexpected tax bill.
“HMRC have not yet indicated how long they expect it to take for a new approval to be received, leaving affected companies and their employees in limbo. This could have a negative impact on employee relations if staff are told they now have to wait to receive their options. It could even impact the recruitment of new employees where EMI options would normally be part of the package offered.
“To enable employers to manage these issues and plan around them, we urge the Government to provide further information as to the expected duration of this hiatus as soon as possible.
“It is worth noting that state aid applies to other areas of UK tax beyond share options, many of which focus on promoting innovation and research.1 Whatever is agreed on Brexit, the issue of state aid approval is likely to have continuing significance. This makes it essential to ensure that we do not end up with another last-minute panic. We accordingly urge the Government to publish and maintain a list of the expiry dates of all existing state aid approvals together with the status of any renewal applications, and to ensure that the relevant applications are started in good time. Failure to avoid lapses in approval could cause severe difficulties for businesses and potentially stifle critical investment in the UK.”
The EMI scheme allows certain smaller companies to grant share options to their employees without income tax or National Insurance Contributions (NICs) being due.2 The scheme is subject to the EU state aid rules,3 meaning that EU approval is required in order for employees to benefit from tax advantages under the scheme.
Any EMI options granted to employees in the period from 7 April 2018 until a new EU state aid approval is received may not be eligible for the tax advantages normally afforded to option holders. HMRC are therefore advising companies that they may wish to delay the grant of any EMI share options until a fresh approval is received.
Notes for editors
1. UK tax reliefs currently falling within the state aid rules include the Enterprise Investment Scheme (EIS), the Venture Capital Trust (VCT) scheme, the small and medium sized enterprises research and development relief, relief for companies carrying on activities in designated ‘enterprise zones’ and the creative sector reliefs (which apply to certain films, animation, television, video games, theatre and museums).
2. The EMI scheme has a number of conditions which need to be met. In particular:
- The gross assets of the company granting the options cannot exceed £30 million
- The total value of shares over which the company has unexercised options cannot exceed £3 million
- The total value of shares over which any one employee can hold unexercised options cannot exceed £250,000
- The company cannot carry out ‘excluded activities’, which include dealing in land, banking, farming, property development, legal and accountancy services and operating hotels, nursing or residential care homes
Where all of the conditions are met, there will normally be no income tax or NICs payable on the grant or exercise of the share option. However, the employee will be subject to capital gains tax when they eventually dispose of the shares.
3. The EU state aid rules are designed to prevent member states introducing measures which may otherwise distort competition within the single market. Broadly, a measure constitutes state aid if it is an advantage granted by a member state on a selective basis to any organisation that could distort competition and trade in the EU.
State aid rules can apply to direct grants or loans, but also to tax breaks provided selectively to certain sectors.
In principle, state aid is not allowed in the EU. However, where a member state believes that a form of state aid would deliver growth or other important objectives they can request approval from the EU.