It’s always recommended that prior to the grant of options under an Enterprise
Management Incentives (EMI) scheme, the market value of a share is agreed with
HMRC.
Historically, HMRC have tended to agree valuations based upon underlying financial performance even if there have been transactions in the company’s shares at or around the same time. In many cases, HMRC have agreed nominal valuations for tax purposes where funding round prices over the same class of share have been significantly higher.
However, earlier this year HMRC reset their approach following an internal EMI Risk Assessment – making their methodology more vigorous and applying the doctrine that there is no better indicator of market value than actual transactions involving the same or similar asset. This ostensibly uses the due diligence undertaken by investors in helping HMRC form their opinion.
If there have been transactions in the same class of share over which the EMI valuation is sought, the price paid on the transaction is now HMRC’s starting point. There is little
regard to underlying company performance.
The change in policy will mean that tax valuations agreed with HMRC will invariably be higher going forward – potentially using up the individual employee EMI limit (£250k) and overall company EMI limit (£3m) sooner than may previously been the case. Further, as many companies gravitate towards the tax value when determining the exercise price, future option holders will find that they need to pay more to exercise their options. This may well be at odds with colleagues who were granted qualifying EMI options prior to the change in HMRC policy.
Perhaps the most notable area where this change will be felt is within start-up companies – reliant on the one hand on share-based funding to survive and on the other, to using share incentives as a means of recruiting and retaining key employees where cash is king. Such company’s will find it’s no longer possible to grant qualifying EMI Options at nominal value without income tax (and potentially national insurance) implications arising on exercise. This is disappointing given the Government’s view of the role that employee share incentives play in economic growth.
If you’d like an informal chat about valuing your business, over the phone or a cup of coffee, please get in touch.