ETASSUM54030 - Enterprise Management Incentives (EMI): Requirements relating to options: Terms of option to be agreed in writing

Paragraph 37, Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

The option must be in the form of a written agreement between the person granting the option and the employee. The agreement can be executed electronically although provisions must be made to ensure employees are able to retain copies of their electronic agreements and acceptance. The agreement must be retained by the company so that it can be inspected by HMRC if an enquiry is opened into the option.

The agreement must state:

  • the date the option is granted,
  • that it is granted under the provisions of Schedule 5,
  • the number, or maximum number, of shares that may be acquired or the formula that will be used for calculating this,
  • the price (if any) the employee will pay to acquire the shares, or the method by which that price will be determined,
  • when and how the option may be exercised, and
  • any conditions such as performance conditions affecting the employee’s entitlement.

The option agreement can either set out details of the performance conditions in the text of the option agreement itself or alternatively, the details may be contained in another document attached to the agreement and incorporated into the agreement by reference to the document (this means that the performance conditions must be identified for participants and it is not sufficient for the company to refer generally to its articles of association or shareholder agreement for example). Examples of other documents include:

  • the Articles of Association,
  • the share scheme rules (where a formal scheme exists), or
  • a shareholders’ agreement which an option holder is required to enter into as a condition of exercising his option (if this exists).

Where the details are included by reference to a separate document, the option agreement will need to specify the title of the document, when it was dated or adopted and the dates of any amendments.

There are no requirements in Schedule 5 about the type of performance conditions that can be imposed or whether such conditions must be objective.

For EMI options exercised prior to 6 April 2023, employer companies were required to set out details of all restrictions on shares in a written agreement between the company and the employee. In the case that restrictions were omitted from grant documentation, HMRC would take into consideration for compliance purposes any evidence that the restrictions had been otherwise brought to a Participant’s attention in a meaningful way at or near the date of option grant. Failure to state a trivial restriction would not be a compliance issue.

From 6 April 2023, the requirement for employer companies to set out details of any restrictions on the shares that can be acquired has been removed.

Employer companies are no longer required to detail within the share option agreement the details of any restrictions on the shares that can be acquired. Further guidance on this change can be found at ETASSUM54080.