Amendments will be proposed to clarify the amount of relief due when certain shares are acquired from the exercise of EMI options. These will take effect for all accounting periods beginning on or after 1 January 2003 to confirm previous understanding of how the CT rules work.
The employer currently gets a CT deduction if qualifying shares are acquired by employees from the exercise of an EMI option. This deduction applies if the option is to acquire shares at their market value when the option was granted. Section 530 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) provides that no charge arises on the employee in these circumstances, but there is still a chargeable event and CT relief matches the difference between the market value when the shares are acquired and the amount paid for them under the option.
However, where an EMI option is granted at a discount to the market value at grant, and the shares to be acquired carry restrictions or conversion rights, the interaction of sections 531 and 476 of ITEPA with Schedule 23 does not provide the correct CT deduction. Section 531 defines the taxable amount for the purposes of section 476 ITEPA as the market value of the shares at the date that the option was granted less any consideration for the option itself and the actual amount paid for the shares: in broad terms the amount of the discount. But as Part 4 of Schedule 23, which deals with the quantum of the CT deduction for restricted shares, provides that this will be the amount that counts as employment income the CT deduction is restricted to the amount of the discount only. It does not also include the amount that is regarded as not taxable, i.e. the difference between the market value of the shares at exercise and the price paid.
HMRC has recently looked again at the existing legislation. As it was not the intention of the original Schedule 23 CT rules to disadvantage EMI options granted at a discount, we propose to amend Schedule 23 to make it clear that the CT deduction for restricted shares acquired from the exercise of an EMI option will take into account both the amount of section 476 ITEPA gain given by section 531 ITEPA and the amount that would be exempt by virtue of section 530 ITEPA if the option had not been granted at a discount.
A similar position arises if convertible shares are acquired at a discount from the exercise of an EMI option and we propose to remedy this also.
We propose to publish draft legislation by the end of February 2006.
As relief has already been claimed on the basis that a full deduction was available there is no effect on past years.
Schedule 23 took effect on 1st January 2003 and so in recognition of the previous understanding of how the existing rules work, HMRC intends to backdate this measure to accounting periods that begin on or after that date.
The purpose of this change is to make sure that one of the policy intents of CT relief, that employers offering EMI are not disadvantaged, is fully carried through in the legislation. Other changes suggested would be considered on their own merits.
Only restricted and convertible shares issued under EMI at a discount will be affected. As the majority of shares issued EMI already qualify for a CT deduction in full the estimated Exchequer Cost is negligible.