One of the less pleasant surprises to come out of HMRC at the end of the tax year was the announcement that EU State Aid approval for the Enterprise Management Incentive (“EMI”) scheme expired on 6 April.
You might think – so what? So did we, actually: while the expiry of approval means that in affording tax benefits to options granted after 6 April 2018 the UK government would be in breach of their obligations under EU law, that is (at least arguably) a matter between the UK government and the EU, and does not affect the rights afforded to taxpayers under UK domestic law. It is to be noted that, unlike some tax incentives, EMI options do not derive their tax benefits by dint of securing the “approval” of HMRC which can be given or withheld: they need merely to meet the statutory requirements and to be “notified” to HMRC.
Nonetheless, rightly or wrongly, HMRC have announced that in their view, “EMI share options granted in the period from 7 April 2018 until EU State Aid approval is received may not be eligible for the tax advantages presently afforded to option holders, and accordingly share options granted in that period as EMI share options may necessarily fall to be treated as non-tax advantaged employment-related securities options.” (By “presently” they mean, of course, “currently” – unless they’ve been taken over by the IRS.)
The expectation is that State Aid approval will be renewed, and HMRC say that they are working hard to ensure the delay in doing so is as short as possible. HMRC confirm their view that the expiry of EU approval will not affect options granted before 7 April 2018, even if they are exercised in the period between 6 April 2018 and the date on which State Aid approval is renewed, and expressly confirm that they will continue to apply current guidance and practice to such options.
Since it is not clear whether any approval will be retrospective, HMRC’s advice to defer granting new EMI options until renewed EU State Aid approval is received is plainly sensible. What of options granted (contrary to or in ignorance of HMRC’s advice) in the interregnum? If approval is renewed and is retrospective – well and good. If not, we can envisage interesting discussions with HMRC about whether the effect on UK taxpayers of any governmental breach of EU law is quite as they assert. Let’s hope it doesn’t get to that.
Given that EU State Aid approval was always time-limited, and in view of HMRC’s view of the effects of its expiry, it might fairly be asked of HMRC why they did not think it necessary to issue their bulletin until two days before approval expired. If you feel like asking, the address is firstname.lastname@example.org!
For more on EMI and share schemes generally, please get in touch with your usual BKL contact or use our enquiry form.