The “wholly or mainly” in the UK test for EMI replaced by a simple test of whether the company has a permanent establishment
Since the introduction of EMI, one of the eligibility conditions for a company to qualify to grant EMI options has been that its trade had to be carried out “wholly or mainly” in the UK. In many cases, it was not immediately clear whether this test would be satisfied and often a lot of time had to be spent in carrying out the relevant investigations to clarify the issue.   It was therefore greeted with relief in many quarters when the Government announced that, following a ruling by the EU Commission on State aid rules, the “wholly or mainly” test would be replaced by a simple test of whether the company had a permanent establishment in the UK.
 
The calling of the 2010 General Election, however, meant that the legislation was not introduced until the Finance Act (No.3) 2010. The change has effect for options granted on or after 16 December 2010.
 
There is, however, an anomaly, which could easily cause confusion for companies operating EMI.
 
Suppose a company which has a permanent establishment in the UK at all relevant times has granted EMI qualifying options both before and after 16 December 2010. If, after that date, the company ceases to carry on its business wholly or mainly in the UK, the options granted before 16 December 2010 will still be subject to a “disqualifying event” for the purposes of the legislation. The consequence is that, while capital growth up to that point is free from income tax, any future growth in share value will be subject to income tax on exercise, unless the option is exercised within 40 days following the “disqualifying event”. The amendment has no retrospective effect so options granted before 16 December 2010 will still be governed by the pre-existing legislation.
 
Options granted on or after 16 December 2010 will be subject to a “disqualifying event” if the company ceases to have a permanent establishment in the UK.
 
Where a company has granted qualifying options both before and after 16 December 2010, it should continue to consider the application of both tests
Thus, where a company has granted qualifying options both before and after 16 December 2010, it should continue to consider the application of both tests. As indicated above, the “wholly or mainly” test is often the more difficult to apply, but HM Revenue & Customs has confirmed that, at present, its clearance procedure will still be available to assist companies in discharging this burden.