Tax update: HMRC guidance updated for EMI options on exercise of discretion by directors

Published: Tuesday 13 December 2022

HMRC have recently released some guidance in relation to the use of directors' discretion for enterprise management incentive (EMI) options.

In many cases EMI options are likely to include provisions allowing for certain discretions to be exercised by the directors of the company. This could include, for example, the decision to treat an employee leaving the company as a ‘good’ leaver or a waiver of or amendment to certain performance conditions.

Care should be taken when taking such decisions which require the use of such discretion as in some circumstances HMRC consider this results in an amendment to the rights under the option.  Where it is deemed that the amendment has resulted in a fundamental change to the terms, it will be treated as though the original option was released and then a regrant of that option. This could then result in the loss of the tax advantages of those options afforded under an EMI scheme (predominantly being that in most cases tax is only payable by the employee on disposal of their shares).

The updated guidance is very lengthy and includes a number of scenarios to consider. In general, however, where discretion is exercised for something other than an amendment to a performance condition or a matter of judgement (e.g. whether someone should be treated as a ‘good’ leaver), then HMRC’s opinion is that it could amount to a fundamental change to the terms of the EMI option. For example, exercising a discretion to bring forward the date upon which the option may be exercised would fall into this category.

HMRC have pronounced that this new guidance is not a change in their position but merely a clarification of their existing opinion.  However, in the absence of such guidance previously some EMI scheme rules may include the provision for certain discretions which could now clearly be in contravention of this.

Whilst the inclusion of discretion in the drafting of the scheme rules will not in itself have a direct impact on the EMI status, the tax advantaged benefits could be lost at the point the director(s) choose to exercise their discretion. We would therefore recommend that care is taken prior to the use of discretion and that professional advice is sought if unsure of the possible knock-on effect following such a decision.

For further information or advice please get in touch with Tom Woodcock on 01242 237661 or

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Tom Woodcock
Partner, Tax
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