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Tax Bite - EMI Share Valuations - HMRC's latest approach

Tax Bite – EMI share valuations – HMRC’s latest approach

In addition to the various tax advantages of EMI options, the ability to agree the market value of the option shares with HMRC is a very useful further benefit of EMI. If shares are simply issued/transferred outside of an EMI option, there is no ability to agree the share value with HMRC and shares in a private limited company are notoriously difficult to value, meaning that there is uncertainty about any income tax charge.

Having the ability to agree the market value when the EMI option is granted provides the optionholder and the employer company with certainty on the tax position when the option is exercised (which, assuming the option was and remains EMI qualifying and the exercise price is no lower than the market value at grant, means no income tax).

However, HMRC’s practice in responding to EMI valuation applications has appeared to vary over time, and at the moment we appear to be in another somewhat difficult patch.

Prior to the Covid-19 pandemic, HMRC started to query valuations more regularly where there had been investment in the company, particularly by small minority investors, and the valuation application sought to differentiate between the price investors were willing to pay and the market value of a small minority shareholding for the purposes of an EMI option grant. This was, in our view, despite there being very good arguments why in many cases the amount investors are willing to pay (particularly if the investment qualified for SEIS / EIS) is not representative of market value for EMI purposes.

During the pandemic, and understandably so given the economic turmoil and uncertainty faced by businesses in many sectors, HMRC appeared to become generally more sympathetic to lower proposed valuations for EMI options. This was coupled with HMRC increasing to 120 days the “window” during which agreed HMRC valuations would be valid. The window has reverted to 90 days from 1 December 2022.

In recent times, we have once again seen examples of HMRC initially rejecting EMI valuation applications in these circumstances. HMRC’s starting position appears to be reverting to the investment price being the “default” market value, and challenging taxpayers and advisers to justify how a discount to that price can be established.

That is not to say that HMRC can’t be convinced that a significant discount to an investment price is appropriate for EMI purposes, and we have been able to do so successfully on numerous occasions. However, HMRC’s stance is resulting in the agreement of valuations taking significantly longer and coming out higher than, until recently, we would have expected. .

Further, growth shares have long been known to be an area where HMRC’s views on valuation have been evolving, and we are definitely seeing more of that in EMI valuation applications. Increasingly, HMRC will refer an EMI growth shares valuation to a specialist valuer, which takes considerably longer than where the “regular” share valuation team provide a direct response, and can result in the valuer querying the basis of valuation and entering into negotiation.

The central theme of HMRC’s view on growth shares is that they should not be regarded as having nil or only negligible value, because you have to take into account “expected returns” i.e., what they are expected to be sold for in the future, albeit discounted for the fact that there is uncertainty and an unknown period of time before they may be sold. In our experience, HMRC are much more likely to accept a growth share EMI valuation proposal without further negotiation if at least some value is included in the valuation application, rather than simply asking for confirmation that the shares have only nominal value.

We are not share valuers, but we have a lot of experience and expertise in presenting EMI share valuations to HMRC, although increasingly we are bringing in specialist valuers where growth shares are involved. As ever please feel free to get in touch if you have clients in need of assistance.