The announcement will come as a relief to qualifying companies who offer Enterprise Management Incentives (EMI) share options, as the EU's original state aid clearance expired on 6 April 2018, according to share plans and incentives expert Graeme Standen of Pinsent Masons, the law firm behind Out-Law.com.
On 15 May the European Commission included in its daily news update a short statement confirming extension of the scheme, which was originally granted state aid approval in 2009. On 16 May the case summary appeared was published in the EU's state aid register. This summary said that the decision would expire on 6 April 2023, but did not specify a start date, indicating that there will be no interruption of state aid approval for EMI options. Further information has not yet been published by either HM Revenue and Customs (HMRC) or the Commission, and it usually takes some time for a public version of a state aid decision letter to be published in the state aid register, Standen said.
"HMRC warned that any intended EMI options granted between 6 April and today might not qualify for EMI tax treatment, and advised that it would be better to wait to grant new EMI options until a new state aid decision was announced," he said. "Although this has not been spelled out in a published statement as yet, it now seems clear that options granted between 6 April and 15 May 2018 will fall within the scope of the new clearance. There remains a possibility that the full decision may include details of some necessary changes to the UK legislation, practice or HMRC guidance relating to EMI options, but one might hope that any major changes would have been announced. Further detail should become available - hopefully fairly soon - from HMRC."
EMI options were introduced under the 2000 Finance Act. They are intended to help smaller companies with growth potential to recruit and retain the best employees, and offer generous tax advantages to EMI option holders employed by companies which qualify, as well as National Insurance contributions (NICs) advantages to their employers.
Unlike the other three UK tax-advantaged share scheme types, EMI options involve the provision of state aid by the UK companies granting them. This is because the direct and indirect benefits of EMI options are restricted to companies with certain business activities, which is not the case for the other schemes, and the associated tax reliefs result in a loss of tax and NICs revenue to the UK exchequer. State aid is generally unlawful under the EU treaties, unless it clearly falls within certain exceptions or has been reviewed, in advance of implementation, by the European Commission and found to be compatible with the relevant treaty provisions.
In its statement, the Commission said that it was satisfied that the scheme was "necessary to help UK SMEs attract and retain talented and skilled personnel". The Commission also noted that the measure "contains a number of safeguards, such as a cap on the value of the share options that can be subject to the tax advantage both at the employee and employer level, ensuring that potential distortions to competition are limited".
"On this basis, the Commission concluded that the measure is in line with EU state aid rules," it said.
EU approval will apply until the date of the UK's withdrawal from the EU, with any longer-term implications falling to be dealt with by the final negotiated withdrawal agreement, according to the Commission. However, competition and state aid expert Alan Davis of Pinsent Masons said that companies "should not be unduly concerned" by this part of the announcement, "which simply acknowledges the legal reality that once the UK ceases to be an EU member state, or, if relevant, when it subsequently ceases to be treated as if it were still a member state, the state aid provisions of the Treaty of the European Union will no longer apply, unless otherwise agreed between the UK and the continuing EU".
"At present, although not yet confirmed, it seems fairly likely that the UK will continue to be treated after Brexit as if it continued as an EU member state until December 2020," he said. "In addition, on the effective Brexit date, the EU's state aid rules and the latest Commission decision itself should be automatically domesticated under the European Union (Withdrawal) Bill unless a different approach to Brexit is taken by the UK, for example, by becoming a member of the EEA, in which case the EU state aid regime will continue to apply."
"The decision should then continue under UK law, but now enforced by the UK Competition and Markets Authority rather than the Commission. It would also be open to the UK to amend the decision in any way it wished, including as to the duration of the exemption," he said.