Discretion clauses in EMI option agreements
HMRC has updated guidance in the Employee tax advantaged share scheme user manual (ETASSUM54300) today.
This is to clarify how the use of discretion clauses affect Enterprise Management Incentive (EMI) options. The updated guidance does not constitute a change in HMRC’s position.
Many EMI option agreements and other plan documents contain discretion clauses. Such clauses provide flexibility for the board of directors of a company to vary the terms of an agreement, after options have been granted.
Depending on the facts, an amendment to the terms of an EMI option agreement using these clauses might result in release and regrant of the option. This would mean that potential tax relief on gains accruing prior to the regrant is lost.
It is also possible that a change in the terms would result in a breach of the conditions for tax advantaged treatment. In this case, Income Tax and National Insurance contributions are deducted on the exercise of options.
The updated guidance sets out the key principles, with examples, that HMRC will use when determining whether:
- the exercise of discretion will be allowable
- the exercise will lead to a release and regrant of a new option
We are aware of a small number of cases where HMRC may have provided advice on the use of discretion clauses which was not in line with the updated guidance. We apologise for this.
For the few cases we are aware of, we will attempt to contact customers who we believe received incorrect advice that may have resulted in the deduction of Income Tax and National Insurance contributions on the exercise of options.
However, we acknowledge we may not be aware of all such cases.
Any customers who think they may have received incorrect advice, resulting in the deduction of Income Tax and National Insurance contributions on the exercise of options, should email: shareschemes@hmrc.gov.uk.
Include ‘ERS Bulletin 46 Discretion’ in the subject line of your email.
You should provide:
- details of the incorrect advice
- supporting documentation (including copies of the option agreements)
- an analysis of why you believe the advice HMRC provided is wrong
There are limits in place for claiming overpaid tax, so you should provide these details as soon as possible.
The statutory time limit for a claim for a refund of overpaid tax is 4 years from the end of the tax year to which it relates. However, claims can be made outside the statutory time limit where an over-payment of tax has arisen because of an error by HMRC and there is no dispute or doubt about the facts.
Restricted securities: section 431 elections guidance updated
A section 431 election is a joint election made (under section 431 of the Income Tax (Earnings and Pensions) Act 2003) by both the employer and the employee, where an employee acquires ‘restricted securities’ from their employer.
On 19 July 2022, HMRC published updated guidance on this in the Employment related securities manual (ERSM30450 and ERSM30460):
This guidance aims to provide helpful, practical clarifications for companies and individuals who jointly enter into these elections.
Discretion clauses in EMI option agreements
HMRC has updated guidance in the Employee tax advantaged share scheme user manual (ETASSUM54300) today.
This is to clarify how the use of discretion clauses affect Enterprise Management Incentive (EMI) options. The updated guidance does not constitute a change in HMRC’s position.
Many EMI option agreements and other plan documents contain discretion clauses. Such clauses provide flexibility for the board of directors of a company to vary the terms of an agreement, after options have been granted.
Depending on the facts, an amendment to the terms of an EMI option agreement using these clauses might result in release and regrant of the option. This would mean that potential tax relief on gains accruing prior to the regrant is lost.
It is also possible that a change in the terms would result in a breach of the conditions for tax advantaged treatment. In this case, Income Tax and National Insurance contributions are deducted on the exercise of options.
The updated guidance sets out the key principles, with examples, that HMRC will use when determining whether:
- the exercise of discretion will be allowable
- the exercise will lead to a release and regrant of a new option
We are aware of a small number of cases where HMRC may have provided advice on the use of discretion clauses which was not in line with the updated guidance. We apologise for this.
For the few cases we are aware of, we will attempt to contact customers who we believe received incorrect advice that may have resulted in the deduction of Income Tax and National Insurance contributions on the exercise of options.
However, we acknowledge we may not be aware of all such cases.
Any customers who think they may have received incorrect advice, resulting in the deduction of Income Tax and National Insurance contributions on the exercise of options, should email: shareschemes@hmrc.gov.uk.
Include ‘ERS Bulletin 46 Discretion’ in the subject line of your email.
You should provide:
- details of the incorrect advice
- supporting documentation (including copies of the option agreements)
- an analysis of why you believe the advice HMRC provided is wrong
There are limits in place for claiming overpaid tax, so you should provide these details as soon as possible.
The statutory time limit for a claim for a refund of overpaid tax is 4 years from the end of the tax year to which it relates. However, claims can be made outside the statutory time limit where an over-payment of tax has arisen because of an error by HMRC and there is no dispute or doubt about the facts.
Restricted securities: section 431 elections guidance updated
A section 431 election is a joint election made (under section 431 of the Income Tax (Earnings and Pensions) Act 2003) by both the employer and the employee, where an employee acquires ‘restricted securities’ from their employer.
On 19 July 2022, HMRC published updated guidance on this in the Employment related securities manual (ERSM30450 and ERSM30460):
This guidance aims to provide helpful, practical clarifications for companies and individuals who jointly enter into these elections.
