As the end of the Brexit transition period approaches, it is still unclear whether the considerable tax advantages offered by Enterprise Management Incentive (EMI) share schemes will continue. The tax treatment of EMI share options currently relies on EU state aid approval and it is not clear what the UK's state aid regime will look like with effect from 1 January 2021, nor whether EMI schemes will retain their approved status under any new domestic state aid regime.
What can be done?
Companies contemplating the grant of share options in the near future may wish to accelerate the grant of any employee share options intended to qualify as EMI options such that they are granted whilst the existing EU state aid approval remains live – i.e. prior to 11pm on 31 December 2020 – to secure the usual EMI tax advantages.
Agreeing share valuations with HMRC and putting the legal documentation in place will take time so we recommend that the 'wheels are in motion' by the end of October. This will give businesses time to implement the scheme and grant options prior to the end of the transition period, ensuring those grants are covered by the existing EU state aid approval.
Whilst the future of the UK's domestic state aid regime is uncertain, it is anticipated that EMI options covered by EU state aid approval would retain approved status under any domestic regime or arrangements implemented following the end of the transition period.
What about options granted from 1 January 2021?
It remains unclear what kind of relationship the UK will have with the EU from 1 January 2021, and whether the position reached in negotiations will require the UK to follow EU state aid rules. The UK government has yet to provide any clear guidance on how state aid rules will apply in the UK going forward, or whether EU state aid rules will be transposed into UK law. The position is further complicated in respect of Northern Ireland where the interaction between the Northern Ireland protocol and the proposed UK Internal Market Bill for state aid purposes may further impact EMI schemes.
A review of EMI was announced by the UK government in its March 2020 budget but this is currently on hold and is unlikely to be looked at until the spring of next year.
Aside from the challenges created by the expiry of the transition period, it is also worth bearing in mind that, following a period of unprecedented government spending due to emergency coronavirus measures, we do not yet know how the UK government intends to account for this expenditure. It is widely expected that this will involve taxation measures which could also affect EMI for 2021 and beyond. However, it is hoped that the UK government will continue to see EMI schemes as a valuable mechanism for incentivising employees; an essential tool for facilitating business recovery in difficult economic times.
To find out more about the benefits of EMI share incentive schemes, or to discuss any of the matters raised in this article, please contact the DWF Tax Team.
Authors: Andrew Carr and Freya Gibb.