United Kingdom: HMRC has published revised guidance on the exercise of a discretion for EMI options

In brief

On 14 October, HMRC published a new section of the Employee Tax Advantaged Share Scheme User Manual (ETASSUM54300), which provides guidance on acceptable and unacceptable exercises of discretion in the context of EMI options. Employment Related Securities Bulletin 46 includes information on what companies should do if they believe HMRC has, in the context of this updated guidance on EMI discretion, previously provided them with incorrect advice (which ultimately led to the operation of income tax on an EMI option).

The guidance confirms that widely drafted discretion clauses in EMI option terms are still acceptable, but the exercise of a discretion must be tied to a specific event (for example, the cessation of an employee's employment or a corporate transaction). Therefore, a general discretion to permit a change to the exercise date, or to accelerate when an option becomes exercisable without a specific event occurring, is not acceptable. Changes to the vesting schedules of EMI options subject to specified time periods will only be acceptable if this change does not alter the timing of exercise.



EMI legislation (paragraph 37 of Schedule 5 to ITEPA 2003) requires that an EMI option's terms must clearly specify, at the outset, when and in what circumstances that option may be exercised. If an option fails to meet these requirements, or if discretion in respect of an option is exercised in such a way as to breach these requirements, then HMRC will determine that the use of the discretion leads to a release of the original option and the re-grant of a new option. 

Most EMI option terms will include a widely drafted discretion clause to enable the company to make decisions to vary these terms, such as amending performance conditions or the treatment of employees upon a specified event. However, this discretion may only ever be exercised in accordance with HMRC's guidance.

Discretion re EMI option exercises triggered by specified events vs. specified time periods

Broadly speaking, there are two types of EMI option schemes: one which allows options to be exercised upon the occurrence of a specified event (termination events, corporate actions, etc.), and one after a defined period of time. In practice, EMI terms with specified time periods as the trigger will often also address the treatment of these options upon specified events too. 

HMRC has provided guidance on exercising a discretion in the context of both EMI types at ETASSUM54340. HMRC states that EMI options may include a discretion to decide whether and the extent to which an option can be exercised on a specified event, since this does not change the timing of the exercise. However, HMRC's guidance on discretion in relation to specified time periods, where the trigger for exercise of an EMI option is the vesting of that option only, is more nuanced. The main points of the guidance are set out below:

  • It is unacceptable to change the vesting schedule of an EMI option where its exercise is contingent on it being vested. Discretion cannot be used to change the timing of the exercise. HMRC's reasoning is that since these types of EMI options are only dependent on becoming vested in order to be exercisable, the vesting schedule cannot change because this would directly impact the exercise date.
  • It is only acceptable to change the vesting schedule of an EMI option if it only becomes exercisable following the last vesting date and that date does not change. 

One could therefore argue that if exercise was not dependent only on time-based vesting (perhaps through the enforcement of additional vesting criteria such as performance conditions), then a change to the time-based vesting schedule would in these circumstances be acceptable.

General Guidance

The other sections of the guidance provide the general principles of acceptable and unacceptable exercises of discretion. The guidance confirms that it will be:

  • Acceptable to exercise an existing discretion to vary or waive a performance condition of an EMI option after grant, provided it is "done on a fair and reasonable basis and in appropriate circumstances" (ETASSUM54310).
  • Acceptable to include a widely drafted discretion clause - this will not, in and of itself, mean that the option fails to qualify as an EMI but any changes from the use of the discretion must still meet the legislative requirements of an EMI option (ETASSUM54330).
  • Acceptable to allow a wide discretion to choose whether an employee should be treated as a "good leaver" (if cessation of employment is a specified event) (ETASSUM54340).
  • Unacceptable to allow a wide discretion to choose post-grant when an EMI option is exercisable (ETASSUM54320).
  • Unacceptable to amend the terms of an EMI option to introduce the ability to exercise a discretion where there was no such discretion in place at grant (ETASSUM54310).

ETASSUM54350 and ETASSUM54360 provide useful examples of acceptable and unacceptable discretion clauses in EMI terms in the context of specified events.

Please note that the guidance set out in ETASSUM54060 and ETASSUM54070 on amending EMI options and amending performance conditions remains in force.

For more information about the exercise of a discretion in relation to EMI options, please reach out to a member of the Employee Benefits team.

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