The best advice to an unquoted company granting EMI options has always been to agree the value of a share with HMRC shortly before grant. This gives certainty:
- the company will know that it isn’t breaching the £3 million limit on the value of EMI options it can grant;
- the option holder can be comfortable knowing that all his options are covered by EMI, as the £250,000 limit held by an individual hasn’t been exceeded; and
- most importantly, everyone will know whether the proposed exercise price is lower than the market value of a share on the date of grant. Unlike other tax-advantaged options, EMI options can be granted with an exercise price lower than the market value at grant (or indeed nil), but income tax and, depending on the circumstances, National Insurance contributions, will be payable on exercise. At least this way the company and the option holder can go in “eyes open”, knowing how much this liability will be.
However, it isn’t essential to agree a share value before grant and many companies skip this step, to save time and/or money. This can come back to bite you in the event that the company is sold, since all parties will want to know about any PAYE liabilities of the company in connection with the EMI options.
Time was that the value of a share at the grant date could be agreed retrospectively with HMRC, even in the run-up to a sale. However, this would add hassle at a pressured time and of course HMRC would have the benefit of 20:20 hindsight, which could lead to a higher value being agreed than might have been the case near the grant date.
On 26 August 2014, the EMI section of HMRC’s Shares and Assets Valuation Manual was updated to read “We will consider a check before the options are granted and during the 12 months and 92 days after the options have been granted” and “[we] can only consider customers’ requests for an agreed valuation for up to fifteen months after the date of grant”. The word on the street is that this deadline will be enforced by HMRC and therefore seeking to agree a share value later, pre-sale will no longer be an option (if you’ll excuse the pun).
So the best advice is now even stronger:
- agree a share value with HMRC before you grant EMI options, or in any event within 15 months of the date of grant; and
- if you’ve granted EMI options within the last year or so without agreeing the value of a share with HMRC, do it now!
Of course, the $64,000 question is “What about those companies which granted EMI options more than 15 months ago without agreeing a share value with HMRC?” Watch this space ….