Budget: Enterprise Management Incentives easements

Welcome changes for tax-advantaged employee share plans – here’s what you need to know.

Employee share plan changes – the key details

Enterprise Management Incentives (EMI) options are the most flexible and generous tax-advantaged employee share options, although they are aimed at smaller companies (with a number of eligibility requirements including not more than £30 million of gross assets and fewer than 250 full-time-equivalent employees). Provided all qualifying conditions are met on grant, and no ‘disqualifying events’ occur before exercise, any growth in share value is income tax and national insurance free. Capital Gains Tax Business Asset Disposal Relief may also apply on a sale of EMI shares, with the holding period beginning on grant, rather than exercise, of the option. But the conditions that must be met to secure these tax advantages are complex. In particular, certain administrative requirements can, if overlooked, jeopardise the qualifying status of an EMI option. Some of these requirements are, however, to be eased. This article sets out the relevant changes, looks at what employers should consider now, and summarises further announcements concerning other tax-advantaged employee share plans.

The current position

The conditions that must be met for options to be ‘qualifying EMI options’ currently include that:

  • The option agreement sets out any restrictions that apply to the underlying shares;
  • The employer declares that the employee has confirmed in writing that they meet the ‘working time requirement’ (i.e. that on average they work at least 25 hours per week for the company or, if less, at least 75 percent of their working time); and
  • The option is notified to HMRC within 92 days of the date of grant.

Failure to meet any of these requirements could, in certain circumstances, result in HMRC denying EMI tax relief on exercise of the option. Often, non-compliance would only be identified during due diligence prior to a sale or flotation when EMI options would be exercised, when managing employee expectations and taking any possible steps to remediate the error might be difficult or impossible. When responding to the Treasury’s EMI call for evidence in 2021, employers and advisers – including KPMG – therefore argued that these requirements should be removed as they were overly burdensome, and the risk that compliance errors presented for EMI tax-advantaged status were disproportionate. The Spring Budget 2023 contained an announcement that these requirements would be changed.

What’s changing?

The Government has announced easements to the EMI regime in two stages.

From 6 April 2023, EMI option agreements will no longer be required to state details of restrictions that attach to the underlying shares. Additionally, employees who are granted EMI options will no longer need to confirm in writing that they meet the working time requirement (though employees must still work at least 25 hours per week or, if less, at least 75 percent of their working time for the relevant company or group, to be eligible for EMI). These changes will also apply to options granted prior to 6 April 2023 which are not exercised until on or after that date. However, legislation is awaited to confirm exactly how this will work.

From 6 April 2024, the deadline for reporting the grant of an EMI option to HMRC will be extended to 6 July following the end of the tax year. This will bring all employer EMI reporting obligations into line with employer reporting for other employee share plans.

What should employers consider?

These are welcome changes to simplify the EMI regime and remove unnecessary ‘bear traps’ that might otherwise result in a loss of the intended tax advantages.

However, the EMI regime remains complex (for example around the use of Board discretion). Employers should continue to take care that their EMI options meet all qualifying conditions on the date of grant, and that ongoing compliance with all continuing requirements is monitored.

Points employers should consider in relation to the recently announced changes include:

  • Were any EMI options which did not meet the requirements regarding stating restrictions and working time declarations exercised prior to 6 April 2023 and, if so, could any steps be taken to address the relevant error?;
  • If any existing options which do not meet the requirements regarding stating restrictions and working time declarations are soon to be exercised, could this be deferred until on or after 6 April in order to avoid any uncertainty as to their tax treatment?;
  • If any options were not notified to HMRC within 92 days of the date of grant, could the employer demonstrate to HMRC’s satisfaction that they have a reasonable excuse for late notification?; and
  • Have all other EMI qualifying conditions been met at all relevant times?

Other employee share plan announcements

Previously announced enhancements to tax-advantaged Company Share Option Plans, which will take effect from 6 April 2023, were confirmed. There will also be a call for evidence on ‘all employee’ tax-advantaged Share Incentive Plans and Save As You Earn (‘SAYE’ or ‘sharesave’) plans to identify opportunities for simplification and improvement. The timing of this call for evidence has yet to be confirmed.

Please contact this article’s authors, or your usual KPMG in the UK contact, to talk through how we could assist you to understand the implications of these announcements for your employee share plans.