The interruption in the awarding of employee share options known as Enterprise Management Incentives in the UK was discussed at a seminar in Jersey recently organised by the local branch of STEP and the UK’s Employee Share Ownership Centre.
Enterprise Management Incentives are invariably set up using offshore trusts, particularly in Jersey and Guernsey, which have built up considerable expertise in this area.
Island-based trusts are used not for tax avoidance purposes, but to avoid the danger of double taxation. If they were onshore, the trustees could be liable for capital gains tax and the employees receiving the benefit might have to pay income tax, which is why the UK authorities support the arrangement.
David Pett, who is believed to be the first UK barrister to specialise in ESOPs, told the Jersey seminar that EMI options were first approved in 2009 and had stood the test of time as a tax incentive that has been very widely used.
‘Enterprise Management Incentive options have been one of the principal schemes to offer tax advantages to small, high-growth companies in the UK,’ he told the JEP.
‘Now it has been put on hold because of European state aid rules.’
The problem arose because of a delay in the UK Treasury applying for renewal of the approval for EMTs given under the EU rules before that expired on 6 April. Since then, domestic legislation has continued to allow EMIs, but not EU rules, and treaty obligations could force any assistance given in the interim to be repaid. There are also other technical problems, including the position of the scheme, where an employer has been taken over between expiry and EU renewal, which is hoped will be in weeks rather than months. In the meantime there is a hiatus.
Mr Pett said: ‘We’re in the rather invidious position where, under domestic legislation, the tax advantage is still available, but we know that unless the EU grants fresh approval on a retrospective basis the government will necessarily have to address the issue of recouping any state aid deemed to have been given before renewal.
‘That’s a primary treaty obligation that will continue to exist post-Brexit.’
The ESOP Centre said that HMRC statistics show 8,610 UK companies operated EMI share schemes during 2015-2016 and 23,000 employees were granted EMI options.