EU state aid approval for EMI schemes

On 15 May 2018, the European Commission announced its decision not to raise objections to the prolongation of the enterprise management incentive (EMI) scheme, on the grounds that it is compatible with the internal market pursuant to article 107(3)(c) of the Treaty on the Functioning of the European Union (TFEU). Its decision was confirmed by way of formal letter to the secretary of state for foreign affairs published on 7 June 2018 (the ‘formal confirmation letter’) and will be effective for a period of five years, but only whilst the UK remains an EU member.

The EMI regime was originally approved by the EU Commission by a decision of 9 July 2009. This approval lapsed on 6 April 2018 leaving a period of uncertainty for companies operating EMI about its long-term future. The announcement, that the prolongation of the EMI regime was necessary to help UK SMEs attract and retain talented and skilled personnel and that distortions of competition and negative effects on trade would be limited, was extremely welcome news.

Practical implications

HMRC issued Employment Related Securities Bulletin No. 28 (May 2018) (the ‘May 2018 Bulletin’), confirming the European Commission’s announcement not to raise objections to the prolongation of the EMI regime. It stated: ‘This decision means that the [EMI] scheme continues to operate in the same way as described in HMRC’s current guidance and practice for employment-related securities options validly granted and exercised as [EMI] share options’.

Although HMRC has not confirmed the position explicitly, this would appear to suggest that EMI options granted during the period between 6 April 2018 and 15 May 2018 (the ‘lapse period’) will benefit from the tax reliefs applying to EMI options, provided they have been validly notified and meet the requirements of the EMI legislation. However, it would be helpful if HMRC would confirm this is the case, particularly given in Employment Related Securities Bulletin No. 27 (4 April 2018) (the ‘April 2018 Bulletin’), it warned: ‘EMI share options granted in the period from 7 April 2018 until EU state aid approval is received may not be eligible for the tax advantages.’

For options exercised during the lapse period, the wording in the original state aid approval - that ‘the notification covers duration until 6 April 2018, which is the period during which EMI share options can be exercised’ (emphasis added) - had given practitioners cause for concern about whether the EMI tax reliefs would apply.

The formal confirmation letter does not provide any ‘effective date’ but it does state: ‘The Commission has accordingly decided not to raise objections to the notified aid measure on the grounds that it is compatible with the internal market.’ Given the aid measure was formally notified by the UK government on 16 March 2018, this must give some level of comfort that the Commission is not intending to raise objections to state aid which might arise as a result of rights granted or exercised during the lapse period.

Further requirements

It is worth noting that the decision has been given on the basis of the UK’s commitment to publish further information in respect of aid awarded in excess of Euro 500,000. The formal confirmation letter references details of: the granting authority; the form and amount of aid granted to eligible employees per SME; aid granted to the SME; the grant date; the region in which the SME is located; and the principal economic sector in which the eligible SME has its activities.

The information must be published within one year from the date the tax declaration is due and be open to the general public without restrictions. The formal confirmation letter notes that ‘the UK authorities will implement the necessary legislative changes to give effect to the ... requirement at the earliest opportunity’.

It will be interesting to see HMRC’s analysis of the disclosure requirements. The formal confirmation letter states that the tax relief provided to employees of SMEs does not constitute state aid within the meaning of TFEU article 107 as it is provided to ‘physical persons’. Reference is, however, made to the aid characteristics of EMI which include:

• the benefits to an SME of enhancing post-tax pay where EMI options are exercised and a gain made;
• the potential savings to SME in terms of recruitment costs; and
• the direct advantage of the potential saving from employer NIC savings.

In order for HMRC to adhere to the requirement, it is possible that it will need to extend the current notification and reporting requirements for EMI as currently set out in ITEPA 2003 Sch 5.

Conclusion

Given the relatively short lapse period, there is much to be thankful for. However, confirmation from HMRC on the continued tax relief available for EMI options granted and exercised within this period would be highly welcomed, along with details of further information which companies operating EMI may be required to supply in the future, to enable HMRC to meet its disclosure requirements.