EMI share options – A (EU) ‘fly in the ointment’

At lunchtime on 4th April 2018, HMRC made the announcement reproduced below as “Employment Related Securities Bulletin No.27”.

It is apparent from this that it would be sensible for companies and/or their shareholders to defer the grant of any EMI options scheduled to be granted after 6th April 2018 until the government has secured fresh EU State Aid approval from Brussels. As yet, we know not when – or even if – this will be, although we do know that HM Treasury is confident that it will be forthcoming, and that this will be sooner rather than later.

If there is some compelling commercial reason why a company needs to grant employee share options after 6th April 2018, and before fresh EU State Aid approval has been given, and such options would otherwise be expected to qualify as EMI share options, careful consideration needs to be given to the terms on which such options are granted so that, if necessary, it will be open to the parties to cancel and re-grant such options at a time when the new options will qualify for the tax reliefs associated with EMI share options.

If the government were to allow the tax reliefs for options purportedly granted as EMI options after 6th April and before fresh approval is given, the government would be obliged, under EU treaty obligations, to recoup from employer companies the element of state aid accorded by such reliefs. In effect, such options will fall to be treated as non-tax advantaged share options.

The final reference to “before 6th April” is an error on the part of HMRC and should read “before 7th April”.

If you would like to discuss this matter further, please contact me by email.


Companies and advisers concerned with the grant of EMI share options

EU State Aid approval for the EMI scheme, expires on 6 April 2018. The government has, since last year, been following the process of applying to the European Commission for fresh approval and we await the Commission’s final response. We won’t receive this before 6 April 2018 and so those involved in the establishment of EMI schemes and grant of EMI share options need to be aware that there will be a period between the lapse of the existing approval on 6 April and a decision by the EU Commission on a fresh approval. The government is working hard to ensure this period is as short as possible.

HMRC considers that the State Aid approval applies to the granting of share options and therefore that share options granted up to and including 6 April 2018 won’t be affected by this lapse of the approval.

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.

Companies may wish to consider delaying the grant of employee share options intended to qualify as EMI share options until fresh EU State Aid approval has been given.

HMRC will continue to apply its current guidance and practice, in relation to employment-related securities options validly granted as EMI share options before 6 April.

A further update will be provided in due course.

[End of announcement]


Share Incentives in Companies under the Control of Private Equity: Some Blue-Sky Thinking?

Employees of companies under the control of another body corporate – in particular, those controlled by ‘private equity’ funds –  are excluded from participating in EMI share option and other tax-favoured employee share plans (SIPs, SAYE schemes and CSOPs). Given the substantial increase in the number of such employees in the UK now that so many British companies have fallen into the partial or entire ownership of such funds, it is suggested that the Government examine how such companies may allow their employees to share in the growth in value to which they contribute through share ownership in a manner which does not put them at a fiscal disadvantage compared with non-employee investors.

It is understood that, if the Government were to afford such a mechanism enabling such employees to participate in a type of share plan which is both relatively straightforward to establish and (crucially) has certainty as to the tax treatment for both employer and employees, members of the BVCA (for example) would be keen to direct or encourage investee companies to establish such plans, given that providing effective incentives to employees is just as much in the interests of the private equity fund as it is in the financial interests of the employees.

The idea of employees benefitting from being joint owners of shares in a company, under a ‘joint share ownership plan’ (or JSOP), was first developed in 2001 and has since been widely adopted by independent companies for allowing selected senior employees to benefit in excess of the limits under tax-favoured plans. The tax treatment of JSOPs has long been settled and accepted by HMRC. A JSOP has the benefit of allowing participants to benefit from growth in value of a share without the need for them to first acquire, and later sell, ownership of the whole of the share. However, at present a company has no certainty as to what is the taxable value of an interest acquired by an employee as joint owner, and the financial risks of discovering some time later that HMRC disagrees with the original estimate of the taxable value of an interest as joint owner of shares is perceived by private equity funds as commercially unacceptable.  Leaving all consideration of tax aside, and all other things being equal, the JSOP is, or would be, the mechanism most favoured by private equity funds (when compared with non-tax-favoured share options, ‘growth shares’ or ‘phantom’ share schemes’).

Accordingly, it is suggested that HM Treasury consider consulting upon (with a view to including in the Finance Act 2019) provisions which will allow and encourage wider use of JSOPs in private equity-owned companies, but with strict rules on valuation and subject to a minimum proportion of the issued share capital of the company being made available to all employees through the plan over a given (10-year?) period.

Outline of the proposed ‘employees’ share scheme’

The idea is that, if a company commits to putting a prescribed minimum proportion of its issued ordinary share capital into joint ownership with all its employees (on an individual and ‘same-terms’ basis, subject only to a qualifying period of employment for eligibility), on terms whereby each participant will, for (at least) so long as he or she remains with the company (or group), benefit from all future growth in the ‘pro rata’ value of the jointly-owned shares (i.e. the growth to which they contribute as employees):

(a)  the taxable value of such ‘interests in employment-related securities’ acquired by each employee would be treated as their intrinsic value (nil); and

(b)  the company could then likewise permit selected employees to acquire such interests in additional numbers of shares of the same class (within a limit) on the basis of the same taxable value (nil).

It is suggested that such limit, on the number of additional shares in which interests as joint owner may be acquired on a selective basis, be a maximum of [8] times the number of shares in which every qualifying employee will acquire an interest as joint owner on that occasion.

To qualify for such favourable treatment:

(i) the shares used must be ordinary shares of the class which is both:

– that which is otherwise owned by the controlling shareholders; and

– the largest class (in terms of nominal value) in issue;

(ii) the ‘pro rata’ value of shares of that class would be determined by taking the ‘market value’ of the whole of the issued share capital of that class (as agreed with HMRC SAV), and dividing it by the number of shares in issue;

(iii) the threshold level, above which participants will be entitled to any increase in value, may be set at or above that pro rata value at the date of acquisition by employees of their interests as joint owners.

The co-owner of the shares would (typically) be the controlling company, but may instead be a trust established for the purpose.

Such an arrangement would:

  • allow all eligible employees to participate in the growth in capital value to which they contribute as employees;
  • require only minimal changes to current tax rules (with which it is entirely consistent) so as to provide that, if all conditions are satisfied, the initial taxable value of such an interest is deemed to be nil;
  • allow employees to participate as actual (joint) shareholders (as opposed to being mere optionholders), and therefore participate in (a pro rata share of) any dividends, and, if the joint ownership agreement so provides, the exercise of voting rights;

[An enhancement might be that, if the whole amount of any dividends on jointly-owned shares are paid to the employee joint owners, all such income would be treated as dividend income of the employee, not as ‘earnings’.]

–     (provided the initial market values of the shares is properly identified and agreed at the outset with HMRC SAV) present little or no scope for abuse or ‘tax avoidance’.

Aside from tax, the concept of such ‘joint ownership’ avoids the situation (as under a ‘qualifying Schedule 2 Share Incentive Plan’) in which the company first ‘gives away’ the current accrued value of the shares, only to have to repurchase, or fund the repurchase (through a trust) of that same value when an employee leaves or wishes to sell. Under a JSOP, the employee only ever acquires an entitlement to future growth in value.

If, on the conditional basis proposed, the initial taxable value of the interests is accepted as nil, the only issue to be settled with HMRC SAV is, in the case of unquoted companies, the initial market value of the whole of the shares of that class in issue immediately after any new issue for the purposes of an award under the plan.

If agreed that the IMV of the jointly-owned shares is to be taken to be their pro rata value (i.e. market value determined on a pro rata basis with no discounts for minority interest, lack of marketability etc.), the legislation might also provide that:

–      if a participating employee (or ex-employee) realises the value of his interest for a consideration calculated on the basis that the market value of the jointly owned shares is likewise determined on a ‘pro rata’ basis, there would be no charge to income tax on such disposal under Chapter 3D, Part 7, ITEPA (disposal of employment-related securities for more than market value); and

–       if the shares are bought back by the issuing company, such a ‘purchase of own shares’ would be treated as a capital transaction and not give rise to a distribution income tax charge (as it would if the interest had been held for less than 5 years).

Practical experience of such ‘joint ownership plans’ since 2001 has been very positive, albeit with the difficulties of determining the initial taxable values of the interests (as joint owners) acquired by employees – exacerbated by the withdrawal by HMRC SAV earlier this year of any facility to agree such values for PAYE and self-assessment purposes.

Encouraging companies to establish such plans by removing that obstacle (identifying the taxable initial value of the employee’s interest) by requiring participation to be extended on an ‘all-employee’ basis would, we believe, prove to be of real attraction to a range of unquoted companies which extends beyond those which presently offer, or could offer, employee share participation.

Crucially, it is estimated that the cost to HM Treasury of facilitating such plans would be de minimis.

The new HMRC Trust Registration Service: an HMRC clarification

This post follows on from that describing the new HMRC Trust Registration Service (“TRS”) below posted in 2017.

HMRC have confirmed, in an email exchange with me, that, in effect, a liability to stamp duty is a liability to a ‘relevant UK tax’ and therefore a trust which has only incurred a liability to UK stamp duty, and no other UK relevant tax, is still obliged to be registered. This may affect trusts holding unquoted shares.

HMRC have stated that their position is “that a trustee of a relevant trust that incurs stamp duty in relation to trust assets in a given tax year [is] required to register that trust on the TRS because the payment of stamp duty will cancel a SDRT charge that may otherwise arise. The TRS Regulations exclude a reference to stamp duty because an agreement for the purchase of shares normally gives rise to an immediate liability to SDRT and the SDRT liability is in turn cancelled by the payment of stamp duty. [HMRC] will ensure that in the next iteration of [their] FAQ guidance [they] will make this position clear”.

It had been widely understood that both the omission of an express reference to stamp duty in the Regulations, and the passage in HMRC’s original guidance, to the effect that a trust would not be regarded as having a liability to a UK relevant tax if there was a particular exemption or relief applicable, meant that trusts which had only incurred a liability to stamp duty, not SDRT, would have no immediate obligation to register. It is now clear that this is not intended to be the case.