HMRC extends share valuation period to 120 days for tax-advantaged share schemes

Earlier this month, HMRC published an update to the Share and Asset Valuation Manual, increasing the period for which an agreed valuation of unquoted shares remains valid for grants under tax-advantaged share schemes from 90 to 120 days. What could this mean for you and your business in the context of EMI schemes?

Enterprise Management Incentive (“EMI”) share options schemes offer an extremely tax-efficient way for employees to share in the growth of the company in which they work. This in turn is beneficial for employers as it is a great way to incentivise staff, who are more likely to be invested in the success of the business as they stand to profit directly as a result.

To be capable of granting options, among other requirements, a company must have assets of less than £30m, fewer than 250 employees and not be majority owned by another company.

Why is it necessary to agree a valuation with HMRC when implementing an EMI scheme?

Normally, when an employee acquires shares in a company and does not pay market value, income tax and national insurance contributions (NICs) will be charged on the difference between the market value of the shares and the price paid for them. However, under an EMI scheme tax is incurred only on the value of the shares at the time of their award rather than at the time of exercise of the EMI option, at which point their value will hopefully have increased.

To determine the tax treatment on the exercise of an option for shares under EMI schemes, it is necessary to agree the market value of shares with HMRC before the options are granted. On 11 January 2022, HMRC extended the period for which an agreed valuation of unquoted shares will remain valid, from 90 to 120 days, provided there is no material change in the company’s circumstances within that period.

Receiving this valuation gives the company and its employees greater certainty regarding the tax treatment of their options.

What are the direct advantages of this extension?

The recent changes to the valuation period provides companies with more time to deal with the administrative tasks for the granting of options under an EMI scheme, whilst also creating opportunities for a company to add a second tranche of employees to the scheme if the first tranche proves successful. As long as this is done within the 120-day window, there will be no need to revisit the valuation with HMRC, simplifying the process in terms of time and cost. Businesses considering the implementation of an EMI scheme should therefore welcome this extension.