The Budget has led to some surprisingly good news for private companies which operate Enterprise Management Incentive (EMI) plans. Because the announced changes considerably reduce the paperwork obligations, they are also now likely to make the sale process for selling companies operating EMI plans easier.
In addition, HMRC has confirmed changes to the other tax-favoured share option plan which private companies less commonly offer, the Company Share Option Plan (or CSOP). These were trailed last autumn but the published draft legislation is more generous than had been expected.
EMI plans
Three changes have been announced.
- Working time declaration
To receive an EMI share option and maintain the full tax benefits, an employee must work at least 75% of his working time for the group. In practice, most employees spend 100% of their working time working for the group in which they have been granted an option, but the employee still needs to certify that they meet this test at the time of grant of their option.
A surprising number of share options have not been accompanied by, or contain, this declaration. While HMRC has often been indulgent with companies that have not obtained these declarations from employees (at least recently), the fact remains that confirmation is needed from HMRC that they will not take this point for any buyer to proceed with a transaction. This can be time consuming, not fit the timetable for a deal as the omission may only be detected late in due diligence and can lead to various deal tools such as retentions and/or specific recovery arrangements being needed to cover the risk.
HMRC has announced that the need for a working time declaration in EMI options will no longer be needed from 6 April 2023. The change is in effect also made retrospectively, so options already granted which did not contain that declaration are treated as having been validly granted.
- Restrictions
Another common paperwork error has been not to have notified employees about the restrictions attaching to their shares when their EMI options are granted, which is another legislative requirement. Restrictions would commonly be matters which reduce the value of employee shares or affect employees' ability to transfer shares, with leaver restrictions being the most common.
This notification is regularly overlooked, or restrictions are left out of the notification (or notification if made at the time cannot subsequently be found) and has again been the source of concern in due diligence when attempting to determine whether an EMI option has been correctly granted. Unlike for the working time declaration, where HMRC did not publicise its willingness often to overlook that particular procedural requirement, HMRC has published guidance on restriction notification requirements and errors, but it had changed over the years and appeared likely to change again.
Like with the working time declaration, HMRC seems to have realised that the root cause was in the legislative requirement which seemed to serve little purpose as employees could do little to change them in any event. It has accordingly not just removed this requirement to notify employees of restrictions from 6 April 2023 for new options but has also retrospectively removed this requirement for all EMI share options granted before that date.
- Time of notification of option
An EMI share option has to be notified to HMRC within 92 days of grant, but, again, a surprising number of EMI options are not notified to HMRC within that timeframe. While there is a reasonable excuse exception which companies can use (and where again HMRC is often kind), finding or being unable to evidence a notification (even if made) has regularly caused concerns on a transaction as there is normally insufficient time to obtain HMRC approval as to how to proceed in the available timeframe, and alternative risk allocation strategies need to be used.
EMI options granted from 6 April 2023 will instead have to be notified within the time frame for completing the company EMI share option annual return i.e., by 6 July of the following tax year, a more generous timeframe.
This change is, however, not retrospective and will only apply from 6 April 2024. It is not clear why, if HMRC has decided that this is a change to make, it cannot also be made from 6 April 2023 (and possibly like the other changes made retrospective). The real problem, however, is that it is difficult to obtain evidence of notification as HMRC does not acknowledge notifications. This problem will sadly remain, whatever the notification deadline.
CSOPs
Two changes have been confirmed
- Increase in limit to £60,000
The limit in the value of shares that can be placed under option under a CSOP option will be increased from £30,000 to £60,000 with effect from 6 April 2023.
This doubling of the limit (as well as the change below) may well make private companies look more attractively at using this scheme. Particular candidates would be companies which can no longer use EMI, cannot use EMI as they are in sectors that are not permitted to use it, and have more than £30 million in gross assets or more than 250 employees. The benefits it offers relative to the costs of establishment may now appear more favourable. Although share options have fallen out as a remuneration tool of choice for quoted companies, this may also make those companies more disposed to consider this scheme.
- Use of employee-only class of shares
Other than in certain limited cases, it has not been possible to operate the CSOP over a class of shares just for employees. This is in contrast to the EMI share option scheme which has greater flexibility.
From 6 April 2023, the requirement for the majority of the class of shares used for a CSOP not to be derived from employment falls away. In a development of the announcement last year, this requirement now falls away not just for new option grants but also for options which are "rolled over" (for example when a new option is granted in exchange for the old option on the insertion of a holding company or other takeover) when the new option is able to take advantage of this freedom as well.
This opens the door for greater use of the CSOP in private companies, although this change will probably not be relevant for quoted companies as they normally just have one class of shares.
If you would like to discuss how these changes affect options already granted and the options you can grant under the EMI or CSOP going forward, please contact Nicholas Stretch or Desiree de Lima.