EMI schemes and use of board discretion: new HMRC guidance

This blog looks at the recently published HMRC guidance addressing some of the more common types of board discretion in EMI schemes.

Last month HMRC published new guidance intended to clarify how the use of board discretion provisions in enterprise management incentive (EMI) option scheme documents can affect the tax treatment of EMI options. The risk is that a decision by the board to exercise discretion may, in some cases, result in the share option being treated as released and regranted. This can result in the loss of the (extremely favourable) tax benefits that the EMI scheme was designed to deliver.

It is not unusual for EMI scheme documents to include provisions to allow for the exercise of board discretion in specified circumstances, in the interest of commercial flexibility. Common examples include to allow for 'good' leavers to still exercise their options, or to allow for 'accelerated' vesting of options, in either case in specific scenarios and subject to particular requirements.

What the new guidance helpfully does is to set out some key principles, together with examples drawing on commonly-encountered scenarios, to illustrate when HMRC might regard an exercise of board discretion as:

• being 'allowable' in the sense that the exercise of discretion will not, of itself, cause the EMI scheme tax benefits to be lost

vs

• resulting in the release and re-grant of the share option

Importantly, the new guidance states that this does not amount to a change in HMRC's position. However, HMRC do say they are aware of some cases where taxpayers have been given incorrect advice by HMRC such that in reliance of that advice tax and NICs have been deducted on exercise of options (when, in fact, no such deductions were required). HMRC are encouraging taxpayers to contact them if they feel they have been given incorrect advice by HMRC in the context of board discretion.

The guidance should be of interest to companies looking to adopt EMI schemes, companies with existing EMI schemes containing board discretion provisions, and companies that have allowed exercise of EMI options in the past through the use of board discretion. 

The guidance is available here.

Key principles

The EMI legislation sets out the 3 'fundamental' terms that must be set out in a written EMI option agreement:

1. he number of shares under option
2. the exercise price per share
3. when the option may be exercised

The new HMRC guidance states that a board discretion provision does not, of itself, cause the option to cease to be EMI qualifying. An exercise of board discretion that results in an amendment to any of these fundamental terms is, however, likely to result in the option being treated as released and regranted (unless the amendment has 'minimal' effect).

HMRC examples

The examples contained in the new HMRC guidance are illustrated below. The 3rd fundamental term referred to above ('when' the option may be exercised) is the focus of these examples.