In brief: a temporary breach of EU law by the UK government could (in theory) negate the attractive tax reliefs for EMI schemes. In practice, this concern only arises for EMI schemes breaching generous financial thresholds, and the average EMI scheme will not be affected. What’s happened? The attractive tax relief available for EMI (Enterprise Management Incentive) schemes require EU state aid approval. Although this approval expired on 6 April 2018, this is mainly an issue between the UK government and the EU commission. Despite the lack of approval, the EMI legislation continues in force, and therefore (a) companies have the right to grant EMI options and (b) companies and employees have the right to claim the normal tax relief attaching to EMI options. HMRC continue to consider EMI valuation submissions and accept registrations of EMI plans and option grants. Why might the tax relief not be available? Since a decision in 1990 by the UK House of Lords in the ‘Factortame’ case (involving a dispute over UK fishing policy), the UK courts have accepted that EU law may take precedence over UK law. The specific EU law affecting EMI schemes is the so-called ‘standstill obligation’ (see note 1) which prevents the UK implementing new state aid measures before they have received approval. It includes powers for the EU commission to require state aid to be recovered from tax payers. The logic here would be that the UK government should not allow UK companies or employees to claim the tax relief under EMI schemes following the expiry of the previous approval, until new approval is given. If such tax relief is given, it could in theory be recovered from a taxpayer. Why ‘in theory’? The obligation to recover tax is restricted by a number of safeguards, both specific to the recovery rules (e.g. that there are ‘no doubts about the aid character’; ‘there is an urgency to act’ and ‘there is a serious risk of substantial and irreparable damage to a competitor’) and general principles (relating to legal certainty and legitimate expectations). On top of these safeguards, there is a ‘de minimis’ exemption for state aid. We note that EMI was operated between 2000 and 2009 in breach of EU state aid rules without approval, and no action was taken to recover the tax relief. What is the ‘de minimis’ exemption? Even where EU state aid has been given without approval, and the UK has been required to recover that aid, this has only applied to amounts above the state aid ‘de minimis’ exemption. This exemption allows for tax relief:
- up to EUR 200,000
- per company
- over a three year period.
- 3-4 employees …
- received a gain from their options of (in total) £320,000…
- resulting in tax relief of £125,000 (well under the EUR 200,000 threshold).