Changes to the UK's tax efficient EMI stock option arrangements
Published on 7th Mar 2017
Companies operating tax-advantaged enterprise management incentive (EMI) stock option arrangements for their UK employees need to be aware of some recent changes in HMRC policy.
Restrictions on shares
An EMI option agreement must contain details of any restrictions on the shares (examples include restrictions on voting or dividend rights and any right of first refusal, lock in or leaver provisions).
Details of the restrictions can either be set out in the option agreement itself, or contained in another document (such as the certificate of incorporation or bylaws) attached to the option agreement and incorporated into the agreement by reference to the document.
The change in HMRC practice is that, where details of restrictions are contained in another document attached to the option agreement, for EMI options granted after July 28, 2016, the restrictions must be identified for participants – it is not sufficient for the company to refer generally to the other document. In practical terms, this means that a summary of the restrictions should now be drafted and enclosed with the option agreement and corporate documentation containing the restrictions.
In addition, the option agreement will need to specify the title of the document incorporated by reference, when it was dated or adopted and the dates of any amendments.
Action: check your EMI documents and processes to ensure that you are adequately highlighting any restrictions to option holders in their option documentation.
Working time declaration
To qualify for tax relief, the grant of EMI options must be notified to HMRC within 92 days of the date of grant. This must be done by the company using the online Employment Related Securities service.
Historically, this was done by sending a paper form (signed by the company and the option holder) to HMRC. However, this form was replaced by the new online notification procedure on April 6, 2014.
The online notification includes the necessary employer declaration, but companies are reminded that the option holder must also sign a declaration confirming that they satisfy the working time requirement (broadly, that they work at least 25 hours a week for the employing company, or 75% of their working time if that is less).
This working time declaration is typically incorporated into the option agreement, and a copy of the declaration must be provided to the option within 7 days of signature.
Action: check your EMI documents and processes to ensure that you are getting option holders to sign a working time declaration at the time of grant.
Ensuring EMI treatment is not lost
Companies should also be aware that whether the company and proposed option holders qualify for EMI treatment must be considered both on grant and during the life of the option. If the requirements are not met, or if certain events occur (such as a change of control of the company or cessation of employment of the option holder), full tax relief will not be available. In such circumstances, income tax, employer’s and employee’s social security contributions will be payable on exercise of the option. If you would like any assistance with proposed grants (including reviewing the terms of your EMI option agreements to check that they comply with current HMRC policy) or your Sub-Plan generally, please contact either our Incentives partner Michael Carter or Steve Wilson.