What are the advantages of agreeing an EMI valuation?
EMI share option schemes can help attract, incentivise and retain key employees. What are the advantages of agreeing an EMI valuation with HMRC?
14 December 2022
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An Enterprise Management Incentive (“EMI”) scheme is a tax-advantaged HMRC approved share option scheme. It works by granting an option to an employee to receive the right to a number of shares if particular exercise conditions are met at a future date.
What are the advantages of agreeing an EMI valuation?
EMI share option schemes are an effective and flexible method of attracting, incentivising, and retaining key employees.
For employees, it can be a tax-efficient one-way bet, free from Income Tax and employer’s and employees’ National Insurance Contributions both on grant and when exercised, provided that the exercise price is no less than the Actual Market Value (i.e. discounted).
However, for an EMI option scheme to be effectively implemented, it must be designed with care.
Before granting EMI options, negotiating and agreeing a valuation of the shares with HMRC is key.
HMRC will agree the market value of shares specifically intended for an EMI option scheme on a without prejudice basis. This is unusual as HMRC is typically unwilling to comment on market values before a share transaction occurs, which is the case in almost all other share transactions or share option schemes.
Whilst voluntary, gaining HMRC’s agreement to the Market Value in advance will provide greater certainty over the employee’s tax position and will reduce the risk of the shares under option being valued higher after the fact.
How long does HMRC’s confirmation of an EMI valuation last?
Historically, HMRC only committed to their confirmation of market value for 90 days, however, it was agreed that Covid-19 could lead to delays in granting EMI options. Therefore, HMRC extended the agreement period to 120 days from 1 March 2020.
However, since 1 December 2022 any EMI valuation agreement letters issued by HMRC on or after that date revert back to being valid for only 90 days, with any agreement letters issued by the department prior to this date remaining valid for the 120 days even where the deadline expires after 1 December 2022.
It is essential to work closely with advisors to grant any EMI options within the prescriptive time periods and not fall foul of the change to the agreement period.
What happens if you need a new EMI valuation & how we can help?
If you have not granted options within the appropriate timeframe, then we can liaise with HMRC’s Shares and Assets Valuation unit (‘SAV’) to agree an extension.
Typically, SAV will only agree to an extension for 30 days, and this was also not offered when the agreement period was 120 days. If it is not possible to agree an extension with SAV, then a fresh application and VAL231 form will need to be submitted.
Achieving the same agreement to the previous valuation submitted will be subject to whether any changes have occurred between the valuation agreement and the new valuation application.
If a new valuation price needs to be agreed, then there may be further factors to consider such as ensuring that no individual exceeds the £250,000 limit and that the total Unrestricted Market Value (UMV) of shares under EMI options granted by the company do not exceed £3 million, if the exercise price has increased.
It is possible to grant options without SAV re-agreeing the valuation, however this could cause complications in the future if a potential purchaser undertakes due diligence, and can result in delays and difficulties arising during the purchasing process.
Contact us
Valuing shares is subjective, and it is always best to seek professional help. If you wish to discuss your existing EMI scheme or the best ways to implement a share incentive scheme, please contact our tax team or your usual Bishop Fleming contact.
EMI share options
See also our other articles on EMI share option schemes:
