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.
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.
Note that the limit is on the amount of tax relief. The tax relief on EMI options occurs when the options are exercised, and will be a proportion of the overall gain on the option. It’s difficult to provide comprehensive guidance, as the calculation will depend on the individual circumstances of each option holder. However, looking at the latest statistics from HMRC (June 2017), EMI options were exercised in 2015/2016 with a total gain of £410 million, over shares in 1,280 companies, resulting in tax relief of £160 million.
For the average company:
- 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).
What does this mean in practice?
The UK’s failure to obtain EU state aid approval was likely a mistake, and does not reflect any policy change. We understand that approval is being sought and should be received in a few months. At that point, these theoretical concerns will be nothing more than a technical footnote in EU law.
For the extremely risk averse, consider whether it’s likely that the options you are granting will be exercised in the next few months, and if so whether it’s likely that the employees will enjoy an immediate gain of many hundreds of thousands. If this applies to your company, you may wish to consider the details of the de minimis exemption.
For most companies granting options to be exercised on an exit or at least over the long term, there will be no issue. Grant EMI options as normal: HMRC will allow you to register them, and will have no grounds to deny the tax relief when the time comes.