With the new year in full swing, we look at what we can expect in the employee incentives space in 2023.
Board discretion for enterprise management incentive (‘EMI’) options:
A key development last year was the arrival of the long-awaited HMRC guidance on the use of board discretion in the context of EMI options in October 2022. The uncertainty around HMRC practice had been causing hesitation in advice and delays on corporate transactions.
The new guidance lists acceptable and unacceptable examples of the exercise of discretion related to the exercise of an EMI option, with regards to timing and quantum. For example, HMRC confirmed the problematic nature of discretion relating to when an EMI option can be exercised without stating the particular event which triggers the board discretion.
There was welcome clarification on the distinction between time-based and event-based exercise, if acceleration of vesting and/or performance conditions is permitted, guidance on acceptable amendments to performance conditions and what amounts to a change to a fundamental term of the option.
The new guidance has clarified some areas but introduced questions in others, for example how best to draft the EMI documentation so that it does not fall foul of the guidance, so it will be interesting to see how interpretations of it pan out going forward, how it impacts drafting approaches and whether a new market standard approach will develop.
Changes to Company Share Option Plan (‘CSOP’) requirements:
Some changes to the rules around CSOP options are on their way.
From 6 April 2023:
- the requirements around the class of share that a CSOP option can be granted over will be relaxed. The current requirements that the share class must be one ‘worth having’ by either being ‘open market shares’ majority-held by outside investors or giving employees control of the company will be removed; and
- there will also be an increase in each individual holding limit from £30,000 to £60,000.
These changes will make CSOPs more attractive to certain companies and create opportunity for incentivising employees in this way where it previously didn’t exist before and to a greater extent. Perhaps this easing will see more CSOPs being put in place and an easier transition for companies to move to CSOP once they no longer qualify to grant EMI options.
Supreme Court decision in Vermillion
In early February we await the Supreme Court decision in HMRC v Vermilion Holdings Ltd. This case focuses on when shares or share options are employment related securities which impacts the tax treatment under the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’). In this case, HMRC have been arguing that income tax and national insurance contributions are payable on the exercise of a share option by the taxpayer in question, whereas the taxpayer’s argument is that it falls solely under the capital gains tax regime. The judgement is likely to be fact-specific owing to the nature of the case (there were fundraising/refinancing quirks and novation agreements involved), but there are bound to be some useful insights around the deeming provisions in ITEPA which will be worth a watch.
Trends in public companies
With the backdrop of a cost of living crisis, war and ongoing post-Covid recovery across society, we will be keeping an eye on reactions to the performance of public companies and their people. Will shareholder approval be given for remuneration packages? How will the increased aliveness to environmental social and governance elements and political pressure impact awards? 2023 is also the year that certain awards granted in the height of the pandemic in 2020 will be vesting and assessed in terms of their performance conditions. It will be interesting to see how that plays out and whether there will be any pushback in terms of those targets and how much reward is merited, when it may be more to do with the world getting back to normal again post-pandemic rather than any outstanding individual or business performance.