Buried in the raft of proposed legislation published by the Government last month are further details of some seemingly uninteresting and procedural changes to the way EMI options operate.
However, if employers fail to comply with these changes, the tax benefits of EMI options, including those options already granted will be lost - with disastrous consequences.
Why is this so important?
Whilst it is very common for the Government to tinker with the way share option schemes work, the crucial point about these proposed changes is that they will apply to all EMI options, not just those granted from the dates that the changes have effect.
What is being changed?
The changes affect the way that HM Revenue & Customs (HMRC) administers EMI options.
From April 2014, an employer must register online any:
- already granted, but currently unexercised, EMI options
- any EMI options granted from that date
New registration requirements are also being introduced in relation to any unapproved arrangements currently recorded on Form 42; and any CSOP, SAYE and SIP schemes (which fall outside the scope of this article).
From April 2015, further changes are being introduced, including:
- the requirement to file all information returns online
- the application of automatic penalties for late filing
- notices to file and reminders will no longer be issued
What should an employer do now?
As well as taking further tax advice on the effect on their current option arrangements, employers should make sure they are registered for PAYE Online, part of HMRC's online service. This is because the Employment Related Securities (ERS) service will be part of PAYE Online.
What happens if an employer fails to comply?
If any EMI options are not registered by 6 July 2015, the employer will not be able to file online returns in relation to those options, and late filing penalties will apply.
However, the most serious consequence is that any unregistered EMI options will lose their tax-advantaged status. Presumably, this means they will be treated in the same way as unapproved options, with disastrous consequences for any EMI option holders.
Currently, it is possible to structure EMI options to take advantage of entrepreneurs' relief, meaning an individual only pays tax at 10% on any option gain. However, should EMI options lose their tax-advantaged status, then income tax at up to 45% will become payable, along with employee's national insurance of 2%.
The employer will also suffer an employer's national insurance charge at 13.8% which, according to most EMI scheme rules, could also be passed on to the employee.
So whilst it is the employer that has to comply with these new requirements, any individual holding EMI options should make enquiries now to ensure their employer is aware of the changes and will take appropriate action.