EMI options have been very popular for many years and one of their advantages over other forms of equity participation has been the readiness of HMRC Share Valuation to agree the market value of unquoted shares as at the date of grant of the option before the award is actually made. This has been helpful and encouraged the use of EMI options as it has given the optionholder and the company certainty at the outset. Usually the option strike price has been set at the agreed market value which ensures that on exercise of the option there should be no income tax charge.

There is no legal requirement to agree a market value with HMRC and sometimes as an economy measure companies do not bother to seek a valuation. This, however, can be a false economy: if the business is subsequently sold and the market value at the date of grant has not been agreed with HMRC, there is an unquantified PAYE and NIC liability. While such a liability can be dealt with through warranties, indemnities and the terms of the transaction, this can cause considerable and unwelcome complications at time of a corporate sale.

Although HMRC’s published share valuation manual now refers to a 15 month window after grant when HMRC will consider retrospective EMI valuations, some companies have assumed that they can wait to agree retrospectively a valuation until a sale is imminent. HMRC practice in this area has been inconsistent. This inconsistency may have arisen because HMRC’s own internal manual used by their staff apparently did not refer to the 15 months deadline.

We understand that this error is being corrected so one should expect the 15 month deadline to be consistently applied by HMRC. With the economy recovering and the number of deals increasing this is an issue which is likely to be of growing significance. Therefore we would strongly recommend that:

1. Companies making EMI awards always seek an agreed market value of shares, preferably before the EMI options are awarded or if not at least within the 15 month post grant window; and
2. Companies that have made EMI grants and have not agreed market values, but are still within the 15 month window, do so as a matter of urgency.