HMRC has published its Employment Related Securities (ERS) Bulletin 32 which contains updates and information relating to share schemes. The key issues to points to note are summarised below.
HMRC has extended the period during which a Company may grant options using the market value of its shares as agreed with HMRC from 60 to 90 days.
Provided all the other requirements are satisfied, if the exercise price of an EMI option is set at or above market value at the time of grant, a subsequent exercise and disposal of the shares acquired should not be subject to income tax and NICs charges. The converse is that if EMI options are granted at less than the market value of a share in the company on the date of grant, income tax and NICs are charged at the point of exercise, on the difference between the market value of the shares at the exercise date and the amount paid for the shares (i.e. the exercise price set from the outset). Therefore, whilst it is not mandatory to agree a valuation with HMRC before the grant of EMI options, it is usually advisable to make use of this facility for the purpose of certainty.
HMRC has stated that agreeing a valuation protects against the market value of shares acquired via the exercise of EMI options being challenged at a later date—this is usually several years after the EMI was granted and if the value of shares in the company has significantly increased in that period of time, the income tax and NICs charges may be significant. HMRC specifically refer to the due diligence process in the event of a sale and the potential implications on a company of failing to accurately determine the market value of shares at the time of grant. Depending on the quantum of options to be exercised and the potential PAYE and NICs liabilities, the uncertainty of whether the options will qualify for EMI tax treatment in the event of a sale could potentially be a key area for negotiation between a seller and a buyer.
Pett Franklin is a multi-disciplinary practice that specialises in share valuations for the purpose of share schemes. We have experience in preparing and submitting valuations to HMRC on behalf of companies of all sizes. To find out more about our valuation service, click here.
Filing ERS Annual Returns
The deadline for filing your ERS online annual return is 6 July and HMRC has pointed out some of the most common mistakes companies usually make in the filing process. If you are using HMRC’s templates for reporting your share schemes, it is important that you follow their suggested format for inputting the relevant information. If you are unsure of how to file your ERS online returns, HMRC’s website has some guidance which you may find useful.
We may also be able to provide assistance with reporting your share schemes, including how to cease a scheme. Read more about filing your ERS annual return here.