What can be done to avoid companies and their employees losing EMI tax advantages?
EMI are the most tax advantaged employee share options. But on exercise, companies and their employees can discover that some or all of the tax advantages have been lost. This can dis-incentivise employees, and potentially be costly to the employer.
EMI options are a great way to recruit, incentivise and retain employees.
However, if the options were not in fact ’qualifying’ EMI options to begin with, or an unexpected ’disqualifying event’ is overlooked, unforeseen income tax charges (and potentially PAYE, National Insurance Contributions and Apprenticeship Levy obligations) can arise on exercise.
Entrepreneurs’ relief for employees may also be lost on the sale of the shares acquired on exercise.
Often the loss of EMI tax advantages is only discovered on a due diligence exercise immediately prior to a sale, listing or other option exercise trigger event.
At this stage, it can be too late to correct the position and can be costly for the employer to compensate employees.
Constant vigilance and expert advice is key to ensuring that EMI options deliver the intended tax advantages.
Reviewing your EMI plan and outstanding options on a regular basis can minimise the risk of inadvertently losing EMI tax advantages and give you time to consider potential corrective action in advance of EMI options being exercised.
As a starting point, employers could consider the following questions:
• Did you check all qualifying conditions were met at the time of each EMI option grant?
• Were share restrictions correctly notified to option holders?
• Have all necessary working time declarations been signed?
• Were the options notified to HMRC in time?
• Can you identify disqualifying events and are you monitoring the risks?
If you are unable to answer yes to these questions in confidence, your EMI tax advantages might be at risk.
Our fact card EMI - Managing your risk discusses EMI compliance risk, and how employers can manage this, in more detail.
KPMG has extensive experience of advising companies on operating EMI plans, reviewing and correcting compliance positions, and undertaking due diligence exercises in preparation for exit.
We can support you to manage your EMI risk and ensure your plan delivers maximum incentive value.
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