Employment and pensions

EMI options | HMRC guidance on exercise of discretions published

Published on 31st Jan 2023

Companies operating EMI plans should consider HMRC's guidance prior to a proposed exercise of discretion

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HMRC has published updated guidance on discretion clauses in tax-advantaged enterprise management incentive (EMI) option documentation.

HMRC indicates that its new guidance (set out in Employment Related Securities Bulletin 46 (October 2022)) clarifies how the use of discretion clauses affect EMI options, and does not constitute a change in HMRC’s position.

Why has HMRC published updated guidance?

To qualify for the tax reliefs available under EMI, a number of conditions must be met, both on grant and during the life of the option. The company and option holder need to qualify under the legislation and the documentation must contain certain specified provisions. The option agreement must specify (among other things) when the option may be exercised.

Typically, an option will normally become exercisable after a specified period of time (often in accordance with a vesting schedule) or on the occurrence of a sale or flotation of the company (sometimes subject to meeting specified performance conditions).

It is common for EMI documentation to contain discretion clauses to provide the board of directors of the company with flexibility to permit an option (or part of an option) to be exercised in certain circumstances. These typically include termination of employment or events such as the sale of the company.   

In certain circumstances, the exercise of a discretion may change the tax treatment of an EMI option.  It may amount to an amendment of a fundamental term of the EMI option (resulting in the release and regrant of the option for legal purposes). This would mean that potential tax relief on gains accruing prior to the regrant is lost.

What does the guidance say?

HMRC's updated guidance sets out the key principles that HMRC will use when determining whether an exercise of discretion will be allowable or whether it will lead to a release and regrant of a new option.

These include the principle that "so long as it is sufficiently clear in what circumstances, and when, an option is capable of exercise from the outset, an exercise of discretion to accelerate the vesting or to vary or waive a performance-related condition is acceptable, provided that the effect of the exercise of discretion is not to bring forward the date on which the option would otherwise become exercisable".

HMRC has also published examples of acceptable and unacceptable uses of discretion.

Osborne Clarke comment

Although the updated guidance is helpful, the examples clearly do not cover all eventualities and some grey areas remain.

Companies are recommended to consider HMRC's guidance and/or take advice prior to the proposed exercise of a discretion under an EMI option, to assess whether it is likely to affect the tax treatment.

Further updated guidance is expected from HMRC on other areas of EMI and tax-advantaged plans more widely (for example discretion clauses in tax-advantaged company share option plan documentation).

Please get in touch with your usual Osborne Clarke contact or one of the experts below if you have any queries or would like to discuss further.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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