One of the more surprising tax developments of the last few days was the announcement on 4 April by HMRC that share options granted under the Enterprise Management Incentive scheme [EMI] would not qualify for tax relief if they were granted after 11pm on 6 April. The reason for this bolt from the blue was that state aid approval ran out at 11pm that evening; but what exactly was the state aid, and why did it run out at such a precisely determined time?
Most people are vaguely aware of the state aid rules, which exist to prevent unfair competition. The Treasury explains it as ‘this (state aid) can occur whenever state resources are used to provide assistance that gives organisations an advantage over others. It can distort competition, which is harmful to consumers and companies in the EU.’
It is easy to see that there would be state aid if the UK government subsidised a particular industry or perhaps favoured UK businesses over companies elsewhere in the EU. But it’s more difficult to identify the state aid in a share option scheme. Indeed, this must have been the view of the British Government because they didn’t apply for state aid approval when the EMI scheme was introduced and were told off by the EU for not applying in time.
So, state aid comes into play if a company issuing EMI options will not pay employers’ NIC on the exercise of an option whereas it normally would under an unapproved arrangement as this favours one group of companies over another. Also, the incentive effects of tax-efficient share options help companies to recruit and retain staff. Although the tax savings are enjoyed by individual employees they are in effect an indirect subsidy to employment costs.
The EU is required to undertake a balancing act in any application for state aid and decided that approval should be given for EMI schemes which has been in place for around 18 years.
However, state aid approval is not indefinite. In this case the grant of state aid was conditional upon some changes to the EMI rules demanded by the EU. Those changes were introduced in the Finance Act 2008 and had effect (at least some of them) for options granted on or after 6 April 2008. EMI options must be exercised within 10 years of grant and that 10 year period is why the approval ran out on 6 April 2018. It can only be assumed that the 11pm deadline is because the EU clocks are one hour ahead of those in the UK.
The government has said that it will be seeking a renewal of state aid approval retrospectively to 6 April 2018, so that the EMI option scheme can continue as before. But at the moment, any company granting EMI options must face the prospect that they will not be effective for tax purposes. It would be for the EU to take proceedings against the UK if the EMI scheme remains on the statute book without state aid approval. This action is likely to be a very long way down the EU’s list of priorities at the moment, but the risk is clearly there.
Of course, after Brexit the UK will not have to worry about state aid and would be free to design future option arrangements in any way it wanted to. The EMI scheme has undoubtedly been a success and is expected to remain part of the UK tax regime in the short and medium term.
State aid compliance has been a very important part of UK tax policy. It has an impact in such diverse areas as Tonnage Tax, Research and Development Tax Credits and Northern Irish corporation tax, to name but three. There appears to be no public record showing exactly when each of the existing state aid approvals in the tax system runs out so there may be some other elephant traps waiting out there. We hope that the Treasury has got this under control and will give more than two days’ notice of any future lapses of approval.
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