Part 7

Employment income: income and exemptions relating to securities
Chapter 9

Enterprise management incentives

Introduction

Enterprise management incentives: qualifying options
527
1
This Chapter provides—
a
for share options notified to an officer of Revenue and Customs to be qualifying options for the purposes of the EMI code, and
b
for exemptions and reliefs from income tax in connection with qualifying options.
2
Schedule 5 contains the requirements that have to be met for a share option to be a qualifying option, together with the notification procedure.
3
The provisions of—
a
this and the following sections of this Chapter, and
b
Schedule 5, ...
c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
together constitute “the EMI code”.
4
In the EMI code—
- “qualifying option” means a share option—
  1. in relation to which the requirements of Schedule 5 are met at the time when the option is granted, and
  2. which is notified to an officer of Revenue and Customs in accordance with Part 7 of that Schedule;
- “replacement option” means an option within paragraph 41(4) of that Schedule (grant of replacement option in connection with company reorganisations);
- “share option” means a right to acquire shares in a company;
- and any reference to the requirements of Schedule 5 is to the requirements set out in paragraph 1(3) of that Schedule.
5
Other expressions used in the EMI code and contained in the index at the end of Schedule 5 have the meaning indicated by the index.

Tax advantages: receipt of option

No charge on receipt of qualifying option
528. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax advantages: exercise of option

Scope of tax advantages: option must be exercised within 10 years
529
1
Sections 530 to 540 apply in connection with the exercise of a qualifying option.
2
But those sections only apply in cases where the option is exercised on or before the tenth anniversary of—
a
the date of the grant of the option, or
b
if it is a replacement option, the date of the grant of the original option.
3
In the EMI code “the original option” means—
a
where there has been one replacement option, the option that that option replaced, or
b
where there have been two or more replacement options, the option that the first of them replaced.

No charge on exercise of option to acquire shares at market value
530
1
This section applies if the option is to acquire shares at not less than their market value—
a
at the time when the option is granted, or
b
if it is a replacement option, at the time when the original option was granted.
2
If this section applies, no liability to income tax arises by virtue of section 476 (charge on exercise etc. of option by employee) in respect of the exercise of the option.
3
This section has effect subject to section 532 (modified tax consequences following disqualifying events).

Limitation of charge on exercise of option to acquire shares below market value
531
1
This section applies if the option is to acquire shares at less than their market value—
a
at the time when the option is granted, or
b
if it is a replacement option, at the time when the original option was granted,
or at nil cost.
2
If this section applies, the section 476 gain is—
CMV - (ACO + ACS)
where—
CMV is the chargeable market value,
ACO is the amount or value of the consideration given for the grant of the option, and
ACS is the amount, if any, for which the shares are acquired.
3
“The chargeable market value” means—
a
the market value of the shares—
i
at the time when the option was granted, or
ii
if it is a replacement option, at the time when the original option was granted, or
b
the market value of the shares at the time when the option is exercised,
whichever is lower.
3A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
In this section “the section 476 gain” means the amount under section 478 (amount of charge under section 476) is to be regarded as the taxable amount for the purposes of section 476 in respect of the acquisition of the shares pursuant to the option.
5
This section has effect subject to section 532 (modified tax consequences following disqualifying events).

Tax advantages where disqualifying events

Modified tax consequences following disqualifying events
532
1
This section applies where—
a
a disqualifying event (see section 533) occurs in relation to a qualifying option before the option is exercised, and
b
the option is exercised later than 90 days after the day on which the event occurred.
2
If the option is within section 530(1) (option to acquire shares at market value), the section 476 gain is—
PEG - ACO
(see subsection (4)).
3
If the option is within section 531(1) (option to acquire shares at less than market value), the section 476 gain is—
(CMV + PEG) - (ACO + ACS)
(see subsection (4)).
4
For the purposes of subsections (2) and (3)—
- ACO is the amount or value of the consideration given for the grant of the option,
- ACS is the amount, if any, for which the shares are acquired,
- CMV is the chargeable market value (as defined by section 531(3)), and
- PEG is the post-event gain, that is the amount (if any) by which the market value of the shares at the time when the option is exercised exceeds their market value immediately before the disqualifying event.
4A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
In subsections (2) and (3) “the section 476 gain” means the amount under section 478 (amount of charge under section 476) is to be regarded as the taxable amount for the purposes of section 476 in respect of the acquisition of the shares pursuant to the option.
6
Nothing in the following provisions—
a
subsections (2) and (3) above, or
b
sections 530 and 531,
applies if the amount that counts as employment income by virtue of section 476 in respect of the exercise of the option would, in the absence of those provisions, be less than the amount that counts as such income as a result of those provisions.

Disqualifying events
533
1
The following provisions deal with the events that are (or are to be treated as) disqualifying events in relation to a qualifying option—
a
section 534 (events relating to the relevant company),
b
section 535 (events relating to the employee), and
c
section 536 (other disqualifying events), read with sections 537 to 539 (which contain supplementary provisions).
2
In the provisions mentioned in subsection (1) “the employee” means the person holding the qualifying option and “the relevant company” means the company whose shares are the subject of the option (see paragraph 1(3) of Schedule 5).

Disqualifying events relating to relevant company
534
1
The following events relating to the relevant company are disqualifying events in relation to a qualifying option—
a
when the relevant company becomes a 51% subsidiary of another company;
b
when the relevant company comes under the control of—
i
another company, or
ii
another company and any other person connected with that other company,
without becoming a 51% subsidiary of that other company;
c
when the relevant company ceases to meet the trading activities requirement (see paragraphs 13 to 23 of Schedule 5).
2
But where a replacement option has been granted, an event within subsection (1)(a) or (b) is not a disqualifying event in relation to the old option (see paragraph 41(2) of Schedule 5) if the event occurs at any time during the period—
a
beginning at the same time as the period within which the replacement option had to be granted (see paragraph 42 of Schedule 5), and
b
ending with the release of the rights under the old option.
3
A disqualifying event is to be treated as occurring in relation to a qualifying option if the circumstances mentioned in subsection (4) arise.
4
The circumstances are that—
a
the relevant company was a qualifying company at the time when the option was granted as a result only of preparations to carry on a qualifying trade; and
b
either—
i
the preparations cease to be carried on, or
ii
the initial period comes to an end,
without the relevant company (or, if it is a parent company, any member of the group) beginning to carry on that qualifying trade.
5
“The initial period” means the period of two years after the date when the option was granted.
6
Paragraph 41(5)(b) of Schedule 5 has the effect that a replacement option is to be treated as granted on the date when the original option was granted.
7
Subsection (1)(a) and (b) do not apply where the relevant company is subject to an employee-ownership trust (within the meaning of paragraph 27(4) to (6) of Schedule 2).

Disqualifying events relating to employee
535
1
The following events relating to the employee are disqualifying events in relation to a qualifying option—
a
when the employee ceases to be an eligible employee in relation to the relevant company as a result of ceasing to meet the requirement in paragraph 25 of Schedule 5 (the employment requirement);
b
when the employee ceases to be such an employee as a result of ceasing to meet the requirement in paragraph 26 of that Schedule (the requirement as to commitment of working time).
2
In addition, a disqualifying event is to be treated as occurring in relation to a qualifying option at the end of any tax year if, during that year, the average amount per week of the employee’s reckonable time in relevant employment was less than the statutory threshold.
3
An employee’s “reckonable time in relevant employment” means the time which the employee in fact spent, as an employee in relevant employment—
a
on the business of the relevant company, or
b
if that company is a parent company, on the business of the group,
together with any time which the employee would, as such an employee, have spent on that business but for any of the reasons set out in paragraph 26(3)(a) to (d) of Schedule 5 (requirement as to commitment of working time).
4
The “statutory threshold” means—
a
25 hours, or
b
if less, 75% of the employee’s working time.
5
For the purpose of applying subsection (2) to the tax year in which the option was granted, any part of that year which preceded the date on which it was granted is to be disregarded in calculating the average amount mentioned in that subsection.
6
In this section—
a
“relevant employment” means employment—
i
by the relevant company, or
ii
if that company is a parent company, by any member of the group;
b
“working time” has the meaning given by paragraph 27 of Schedule 5 (meaning of “working time”).

Other disqualifying events
536
1
The following are also disqualifying events in relation to a qualifying option—
a
any variation of the terms of the option whose effect is either—
i
to increase the market value of the shares that are the subject of the option, or
ii
that the requirements of Schedule 5 would no longer be met in relation to the option;
b
any alteration to the share capital of the relevant company—
i
to which subsection (2) (share values affected by alteration of rights or restrictions) of section 537 applies, and
ii
whose effect is that the requirements of Schedule 5 would no longer be met in relation to the option;
c
any alteration to the share capital of the relevant company to which—
i
subsection (2) (share values affected by alteration of rights or restrictions), and
ii
subsection (3) (alteration designed to increase share values),
of section 537 apply;
d
a conversion of any of the shares to which the option relates into shares of a different class, except in a case within section 538(2); and
e
the grant to the employee of a relevant CSOP option, if immediately after it is granted the employee holds unexercised employee options in respect of shares with a total value of more than £250,000 .
2
In subsection (1)(e)—
- “relevant CSOP option”, and
- “employee option”,
- have the meaning given by section 539 (CSOP and other options relevant for purposes of this section); and sub-paragraphs (6) to (8) of paragraph 5 of Schedule 5 (determination of value of shares) apply for the purposes of subsection (1)(e) as they apply for the purposes of paragraph 5.

Alterations of share capital for purposes of section 536
537
1
This section has effect for the purposes of section 536(1)(b) and (c) (other disqualifying events: alterations of share capital of relevant company).
2
This subsection applies to an alteration of the share capital of the relevant company if—
a
the alteration affects (or but for the occurrence of some other event would affect) the value of the shares to which the option relates; and
b
it consists of or includes—
i
the creation, variation or removal of a right relating to any shares in the relevant company,
ii
the imposition of a restriction relating to any such shares, or
iii
the variation or removal of a restriction to which any such shares are subject.
3
This subsection applies to an alteration of the share capital of the relevant company if the effect of the alteration is to increase the market value of the shares to which the option relates and either—
a
it is not made by the relevant company for commercial reasons, or
b
the main purpose (or one of the main purposes) for making it is to increase the market value of those shares.
4
In this section any reference to—
a
a restriction relating to shares or to which shares are subject, or
b
a right relating to shares,
is a reference to such a restriction imposed or right conferred by any contract or arrangement or in any other way.

Share conversions excluded for purposes of section 536
538
1
This section has effect for the purposes of section 536(1)(d) (other disqualifying events: share conversions).
2
A conversion of shares is not a disqualifying event if—
a
it is a conversion of shares of one class only (“the original class”) into shares of one other class only (“the new class”);
b
all the shares of the original class are converted into shares of the new class; and
c
one of the conditions in subsection (3) is met.
3
The conditions are—
a
that immediately before the conversion the majority of the relevant company’s shares of the original class are held otherwise than by or for the benefit of—
i
directors or employees of the relevant company,
ii
an associated company of the relevant company, or
iii
directors or employees of such an associated company;
b
that immediately before the conversion the relevant company is employee-controlled as a result of holdings of shares of the original class.
4
“
associated company
” has the
meaning given by section 449 of CTA 2010
,
“
director
” has the same meaning as in the benefits code (see section 67) but also includes a person who is to be or has been a director,
“
employee
” includes a person who is to be or has been an employee, and
“
employee-controlled
” has the same meaning as in Chapters 1 to 4 of this Part (see section 421H(1)).

CSOP and other options relevant for purposes of section 536
539
1
This section has effect for the purposes of section 536(1)(e) (other disqualifying events: grant of CSOP option).
2
A “relevant CSOP option” means a CSOP option granted to the employee by reason of the employee’s employment—
a
with the employer company, or
b
if it is a member of a group of companies, with any member of that group.
3
A share option is an “employee option” if it is—
a
the qualifying option mentioned in section 536(1), or
b
another qualifying option granted to the employee by reason of the employee’s employment as mentioned in subsection (2)(a) or (b) above, or
c
a relevant CSOP option.
4
In this section a “CSOP option” means an option to acquire shares under a scheme which is a Schedule 4 CSOP scheme (see Schedule 4).

Tax advantages: taxable benefits

No charge on acquisition of shares as taxable benefit
540
1
... Chapter 3C of this Part (taxable benefits: notional loans in respect of acquisitions of shares) does not apply in relation to the acquisition of shares by the exercise of a qualifying option.
2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other income tax consequences

Effects on other income tax charges
541
1
Nothing in the EMI code affects—
a
the operation of Chapters 2 to 4 of this Part in relation to shares acquired under a qualifying option, or
b
the operation of Chapter 5 of this Part otherwise than in relation to the acquisition of shares under a qualifying option.
2
But in calculating the taxable amount for the purposes of section 426 (post-acquisition charge on restricted securities) in respect of shares acquired under a qualifying option, the amount of relief on the exercise of the option is to be regarded as a deductible amount for the purposes of section 428 (amount of charge).
3
“The amount of relief on the exercise of the option” means the difference between—
a
the amount that would have counted as employment income by virtue of section 476 in respect of the exercise of the option apart from the EMI code, and
b
the amount (if any) that in fact counts as such income in accordance with the EMI code.
Words in s. 540(1) substituted (with effect in accordance with Sch. 22 para. 40(2) of the amending Act) by Finance Act 2003 (c. 14), Sch. 22 para. 40(1)
Pt. 7: power to modify conferred (7.4.2005) by Finance Act 2005 (c. 7), s. 21(8)-(10)
Words in s. 538(4) substituted (with effect in accordance with s. 1184(1) of the amending Act) by Corporation Tax Act 2010 (c. 4), s. 1184(1), Sch. 1 para. 392 (with Sch. 2)
S. 531(3A) omitted (with effect in accordance with s. 12(5)-(7) of the amending Act) by virtue of Finance Act 2017 (c. 10), s. 12(3)(b)
Words in s. 531(4) substituted (1.9.2003) by Finance Act 2003 (c. 14), Sch. 22 para. 37(1)(2); S.I. 2003/1997, art. 2
Words in s. 539(4) substituted (6.4.2014) by Finance Act 2014 (c. 26), Sch. 8 paras. 198, 204 (with Sch. 8 paras. 205-215)
S. 527(3)(c) and word omitted (with effect in accordance with Sch. 3 para. 9(4) of the amending Act) by virtue of Finance Act 2016 (c. 24), Sch. 3 para. 9(3)(b)
Words in Act substituted (18.4.2005) by Commissioners for Revenue and Customs Act 2005 (c. 11), s. 53(1), Sch. 4 para. 102(1); S.I. 2005/1126, art. 2(2)(h)
S. 528 repealed (1.9.2003) by Finance Act 2003 (c. 14), Sch. 22 para. 36(1)(2), Sch. 43 Pt. 3(4); S.I. 2003/1997, art. 2
S. 540(2) omitted (with effect in accordance with Sch. 9 para. 48 of the amending Act) by virtue of Finance Act 2014 (c. 26), Sch. 9 paras. 16(3), 47
S. 532(4A) omitted (with effect in accordance with s. 12(5)-(7) of the amending Act) by virtue of Finance Act 2017 (c. 10), s. 12(3)(b)
S. 541(1)(2) substituted (1.9.2003 with effect in accordance with Sch. 22 para. 41(2) of the amending Act) by Finance Act 2003 (c. 14), Sch. 22 para. 41(1); S.I. 2003/1997, art. 2
S. 534(7) inserted (retrospective to 1.10.2014) by Finance Act 2016 (c. 24), Sch. 3 para. 1
Word in s. 532(1)(b) substituted (with effect in accordance with Sch. 2 para. 94(2) of the amending Act) by Finance Act 2013 (c. 29), Sch. 2 para. 94(1)
Word in s. 527(3) inserted (with effect in accordance with Sch. 3 para. 9(4) of the amending Act) by Finance Act 2016 (c. 24), Sch. 3 para. 9(3)(a)
S. 535 modified (temp.) (with effect in accordance with s. 107(5) of the affecting Act) by 2020 c. 14, s. 107(1)(4) (as substituted by Finance Act 2021 (c. 26), s. 24)
Words in s. 532(5) substituted (1.9.2013) by Finance Act 2013 (c. 29), Sch. 23 paras. 14(3), 38; S.I. 2013/1755, art. 2
Pt. 7 heading substituted (with effect in accordance with Sch. 22 para. 2(2) of the amending Act) by Finance Act 2003 (c. 14), Sch. 22 para. 2(1)
Words in s. 540(1) omitted (with effect in accordance with Sch. 9 para. 48 of the amending Act) by virtue of Finance Act 2014 (c. 26), Sch. 9 paras. 16(2), 47
Words in s. 532(5) substituted (1.9.2003) by Finance Act 2003 (c. 14), Sch. 22 para. 38(1)(2); S.I. 2003/1997, art. 2
Word in s. 536(1)(e) substituted (16.6.2012) by The Income Tax (Limits for Enterprise Management Incentives) Order 2012 (S.I. 2012/1360), arts. 1, 2(2)(c)
S. 538(4) substituted (1.9.2003) by Finance Act 2003 (c. 14), Sch. 22 para. 39(1)(2); S.I. 2003/1997, art. 2