It has become apparent that some smaller companies and their advisers may have been tripped up over the changes made in 2014 to the process for the notification of the grant of Enterprise Management Incentive (“EMI”) share options.
To qualify for favourable tax treatment as an EMI share option, the option must satisfy the requirements of Parts 2-6 of Schedule 5, ITEPA 2003, and the grant of the option must be notified to HMRC in accordance with Part 7. Part 7 now requires that notice be given online (through the company’s PAYE portal). The online notification must include a declaration by a director or the secretary of the company that the requirements of Parts 2-6 are met, that the information provided is correct and complete, and that the employee to whom the option was granted has made and signed a declaration, held by the employer, that the individual concerned meets the working time commitment in relation to the option (“the WTC declaration”). There is a further requirement that a copy of the declaration must be given to the employee within 7 days after it is signed by the optionholder.
The Working Time Commitment
In 2014, HMRC accepted that, for ease of administration, the WTC declaration by the grantee could be included as a term of the option agreement and, in practice, this is commonly done. If it is not, the declaration, which may be made electronically (but must then contain an ‘e-signature’ by the employee) may be made at any time before the notification is given. If the WTC declaration is electronic, a copy need not be given to the optionholder as he is deemed to have a copy. If the WTC declaration is in written form, or the employee signs the option agreement, or a counterpart copy, care is needed to ensure that he or she is given a copy of the signed version within 7 days after he or she signs it – which may be sooner than it is signed by the grantor.
What is unclear from the legislation is the intended consequences of a failure to meet these requirements as they apply to the WTC declaration. A £500 penalty may be imposed by HMRC for a failure to produce, within 7 days, the WTC declaration upon request from HMRC, and for failure to provide a copy to the optionholder within 7 days of signature. The uncertainty lies in whether any such failure allows HMRC to challenge the qualifying status of the EMI option. HMRC have suggested that, if the requirements of Part 7 are not fully met, the option will not have been “notified to [HMRC] in accordance with Part 7” and the option is therefore not a ‘qualifying option’ per para 1(2) of Schedule 5.
Pett Franklin’s View
In our view, this is not correct: if that had been intended, the draftsman would have defined “the requirements of the Schedule” as including the requirements of Part 7. If an option satisfies the requirements of Parts 2-6 when it is granted, and it is in fact notified to HMRC within the 92-day time limit, a failure to meet those procedural requirements of Part 7 for which a penalty has been specifically provided in the legislation, should not prejudice the status of the option itself. Indeed, given that the legislation allows an option which has been notified to HMRC out of time to retain its qualifying status if the company has a ‘reasonable excuse’ for not notifying within the 92-day period, it would be strange if the optionholder forfeited valuable tax reliefs by reason only of the fact that the company, having notified the grant within that period, had (for example) failed to provide to the employee a copy of the signed WTC declaration within 7 days of signature, or the notification was found to be incorrect in some other respect.
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