After the publication of the 2008 Finance Bill on 27 March 2008, we look at the key changes which affect employee incentives and suggest what you should be doing about them.

EMI options

The three changes to enterprise management incentives (or "EMI") are as follows:

  • The limit on the value of shares which can be placed under EMI options granted to any one employee has been raised to £120,000 from £100,000 with effect from 6 April 2008

  • Only companies with fewer than the equivalent of 250 full-time employees will be able to grant further EMI options with effect from the date of Royal Assent (likely to be July 2008)

  • Shipbuilding, steel and coal production will be excluded trades (again with effect from Royal Assent)

Increase of the individual limit to £120,000

The limit is on the value of shares which an individual may hold subject to a qualifying option at any one time. It is measured by reference to the "unrestricted market value" of option shares on the grant date (after taking into account any outstanding CSOP options).

Additional option grants to any individual are prevented within 3 years but the rule only applies if the employee has been granted qualifying options with a total unrestricted market value "of £100,000".

Well drafted plan rules usually prevent the application of the 3 year rule by specifying a limit of £99,999 per employee on the value of shares which may be subject to qualifying options.

If your plan rules include a £99,999 limit, the rules will need to be amended to allow options to be granted up to the new limit which should itself be expressed as £119,999 for the same reason. Fortunately the limit is being increased by treasury order, HMRC have chosen not to block the loophole which prevents the application of the 3 year rule (which would require an amendment to the EMI legislation).

The increase in the individual limit will not require prior shareholder approval if your plan contains the usual rule which allows the board to make amendments to obtain or maintain favourable tax treatment (but you need to check the rules!).

250 limit on the number of employees

After the Finance Act 2008 receives Royal Assent, only companies with the equivalent of less than 250 full-time employees will be able to grant EMI options but existing qualifying options will be unaffected. For a summary of the conditions which companies must meet to qualify for EMI, including the new limit, click here.

Each part-time employee is to be counted as a "just and reasonable" fraction of a full-time one in order to calculate whether the company exceeds the limit. We understand HMRC will publish guidance on how to calculate the limit which is likely to be similar to existing guidance on EIS relief. If so, employees on maternity or paternity leave and students on vocational training will not count but non-executive directors will count as full-time employees.

Companies that will exceed the limit should consider granting more EMI options before Royal Assent. If you operate a plan which involves free shares (such as a long term incentive plan or performance share plan) these can be structured so as to benefit from EMI. They should be structured as nil cost options as EMI options can be discounted. We can easily draft the necessary amendements to your plan rules if you do not do this already.

We are currently advising a company which qualifies for EMI but will cease to do so on Royal Assent due to the 250 limit. The company is considering whether to establish a company share option plan (or "CSOP") to allow tax-favoured options to continue to be granted to employees after Royal Assent.

Shipbuilding, coal and steel production

After Royal Assent, companies engaged in shipbuilding, coal and steel production will no longer qualify for EMI. This tightening of the conditions is unlikely to have any impact as it is hard to imagine such companies currently qualify for EMI (due to the £30 million gross assets test).


The Government say they have tightened the EMI tests to comply with EU state aid rules but cynics might suggest the additional tests have been introduced to cut costs.

The cost of EMI has already been reduced by the abolition of taper relief since 6 April 2008 as announced in the pre-budget report. Taper relief ran from the grant of EMI options and allowed employees to benefit from an effective CGT rate of 10% on the sale of option shares just two years after grant whereas EMI option-holders will now pay CGT at the new flat rate of 18%.

HMRC statistics published on 2 July 2007 revealed the cost of EMIs for 2005 / 2006 to be £170 million. We think this is a small price to pay for a plan which allows dynamic small companies to attract and retain vital talent - the tax advantages of EMI should not be eroded further!

NOR employees must be offered participation in SIPs and SAYE

From 6 April 2008, awards and options made under HMRC approved share incentive plans and SAYE option plans must be offered to employees who are resident but not ordinarily resident. This will require amendments to the plan rules.

The employment related securities regime is being extended to employees who are resident but not ordinarily resident (“NOR employees”), we have a separate article on these changes in this edition.

The changes to the SIP and SAYE legislation will require companies that operate SIPs and SAYE plans to offer participation to NOR employees. It seems logical for these plans to be required to be extended to such employees in line with the extension in the tax charge to them. The Finance Bill says these changes take effect from 6 April 2008 even though Royal Assent will not be obtained until July.

If read strictly, the changes mean no further offers can be made to employees under SIPs or SAYE plans until the plans have been amended to require resident but NOR employees to be offered participation. HMRC will doubtless clarify whether they expect amendments to be made before the Finance Act 2008 receives Royal Assent. We will update this article on our website when the position has been clarified.

The changes will require HMRC approval. If your plan rules contain the usual amendment provision which allows changes to obtain or maintain favourable tax treatment to be made by the board without shareholder approval, the necessary amendments should be straight-forward.

Please get in touch with us if you would like us to draft the necessary changes and agree these with HMRC. We can also update your explanatory booklets to take account of the new CGT regime (covered in a separate article in this edition) and new rates and allowances.

Changes to residence and domicile rules

Major changes to the tax treatment of individuals who are resident but not ordinarily resident and / or non-domiciled take effect on 6 April 2008. These are covered in more detail in a separate article in this edition.

Changes to car benefit rules

Where employers provide cars (not a car cash allowance) to employees, the taxable amount is calculated as the price of the car for tax purposes multiplied by the "appropriate percentage", which is based on the car's carbon dioxide (CO2) emissions.

The price of the car for tax purposes has not changed - this is basically the list price when new, plus accessories, less any capital contribution by the employee.

With effect from 6 April 2008 the appropriate percentages have been changed as follows:

  • The lower threshold of 135 g/km CO2 emissions has been reduced from 140 g/km.

  • A new category has been introduced for "qualifying low emissions cars" a.k.a. QUALECs (not to be confused with any characters from Doctor Who). These are cars with a CO2 emissions figure of exactly 120 g/km or lower. QUALECs generally benefit from an appropriate percentage of 10% although if they run on diesel the rate will be 13% as the 3% diesel supplement will apply. This change does not apply to electric-only cars, which keep their net appropriate percentage of 9%.

  • There is a new 2% reduction for cars manufactured to be able to run on E85 fuel, a mixture of p85 percent bio-ethanol and 15 percent unleaded petrol.

Employees selecting a new company car should therefore continue to choose very carefully. We hope that HMRC will update its “ready reckoner” calculator for these purposes soon to take into account the new rules.