HMRC Valuation Delays

Our clients should plan longer led times for incentives grants under their UK tax-advantaged enterprise management incentive (EMI) option plans and company share option plans (CSOP) due to potentially significant delays in agreeing share valuation applications with the HM Revenue & Customs (HMRC) Shares and Assets Valuation team (SAV). Where it is undesirable to wait for such valuation agreement, we can provide practical solutions for our clients - find out more below.

SAV valuations

Bird & Bird's Employee Incentives & Benefits (EIB) team deals with a large number of SAV valuations for its clients. Although these valuations are not compulsory under UK law, they do help in securing the highly beneficial EMI option and CSOP tax status for our clients and their optionholders.

Once obtained, SAV valuations are valid for, at most, a period of 90 days from the date of agreement. Unlike US 409a valuations, any circumstances which might affect the valuation after obtaining a valuation agreement from SAV will generally invalidate the agreed valuation.

Tax implications of a SAV valuation

EMI options and CSOP options are two types of UK tax-advantaged share option plan. Provided that certain conditions are met, any increase in value of the underlying shares should fall within the capital gains tax regime rather than the income tax regime in the UK. Currently, the top rate of capital gains tax in the UK is 20% (and EMI optionholders are generally able to secure a lower rate of 10% under special business asset disposal relief rules for EMI options); compare this to a top income tax rate of 45% plus 2% employee social security contributions and 13.8% employer social security contributions (which totals 60.3% tax that could be levied on the optionholder).

For CSOP options, if the exercise price is manifestly less than the market value of the shares underlying the CSOP option as at the date of grant, the entire gain (if any) in the value of the shares acquired on exercise of the CSOP option will be subject to income tax (and, if the shares are readily convertible assets at the time of such exercise, social security contributions will be due also). As such, it is of paramount importance that the market value of the shares being placed under CSOP option is clear at the time of grant.

For EMI options, the outcome of setting the exercise price below the market value of the shares underlying the EMI option as at the date of grant is less severe: the difference between the exercise price set and the market value agreed with SAV will be subject to income tax at the time of exercise (and, if the share are readily convertible assets at such time, social security contributions also) but any increase in the value of the shares acquired on exercise above the market value should continue to fall within the capital gains tax regime. Nonetheless, we strongly advise our clients to agree the market value of the underlying shares with SAV for EMI option grants to help prevent issues on exercise further down the line, for example, at an exit event when a costly escrow arrangement may otherwise be required pending a decision on the correct amount of tax to be withheld and paid to HMRC.

For these reasons, it is usual to agree the market value of the share being placed under EMI and CSOP options with SAV prior to grant.

Please see our EMI and CSOP factsheets here for further details of these, and other, tax benefits of establishing and operating an EMI option plan and/or a CSOP for UK directors and employees.

Valuation delays

Over the past few months, the response time for valuation applications to SAV in respect of EMI options and CSOP options has been unpredictable in our experience, with valuations taking anywhere between the expected one-to-two-week period and three and a half months. We understand that other city firms are experiencing similar delays.

The share plans industry is intending to approach HMRC to better understand the reason for such delays but, in the meantime, clients wishing to obtain a share valuation for their EMI or CSOP options should allow longer lead times for their proposed grants. Where this is not possible or desirable, please reach out to us to discuss tailored solutions and practical workarounds – we would be delighted to help.

Your trusted adviser

If you are planning to award EMI options or CSOP options to your directors and employees in the near future, please contact Sarah Ferguson or Nick Kosloff at Bird & Bird LLP and we will guide you through the process.

Written by Sarah Ferguson and Nick Kosloff.