EMI Valuations – Essential or Nice to Have?

Does my company really need an EMI valuation agreement from HM Revenue & Customs (HMRC) before granting EMI options?  That’s a reasonable question, especially for companies working with limited budgets.


It is true that it is not a legal requirement for an EMI valuation of the company’s shares to be obtained from HMRC before you grant EMI options.

However, RM2’s view is that obtaining such an EMI valuation agreement from HMRC is strongly advisable, for a number of reasons.

Certainty as to tax treatment

Firstly, the fact that you can agree the tax market value of the shares with HMRC does give everyone certainty as to the tax treatment on exercise.  If EMI options were granted at less than market value, there is a risk of unexpected income tax and NICs charges when the options are exercised.

Red flag on due diligence during a sale

Just as important, though, is what happens if your company is sold.  If there is a future sale of the business, the buyer’s legal team will expect to see that that you agreed a valuation with HMRC for the EMI options.  This will likely be a very important item on their due diligence checklist.  For the average due diligence tax accountants/lawyers, share valuations in both EMI and non-EMI scenarios are a red-flag item. If there’s no agreed or formal valuation in place, they will undoubtedly investigate further.  

If the purchaser finds out that such an EMI valuation agreement was not obtained, then this can potentially make the sale transaction itself more difficult.  Not ideal, at a time when the sellers will already have very considerable calls on their time and also arguably have “bigger fish to fry”.

Additional costs and warranties

The buyer may wish to seek additional warranties and indemnities from the sellers, request that the sellers place an appropriate sum “in escrow” to cover potential additional liabilities arising or request a “price chip” on the purchase price reflecting the greater possibility that HMRC may look into the EMI valuation.

Fees spent in agreeing an EMI valuation at the time options were granted may well pale into insignificance as against “after the fact” investigations, when the company is likely to have a couple of sets of transaction lawyers and due diligence accountants arguing about the most appropriate way to deal with the issue.

Transaction lawyers will not have significant amounts of time to sort out a solution (as the main deal needs to be done!) and would not have time to speak to HMRC about this issue.  Nor would HMRC be prepared to provide any kind of post-transaction valuation check.  Such helpful checks were unfortunately stopped by HMRC a number of years ago.

Growth shares pose a higher risk

As a final point, if a “growth share” (or in fact any highly-leveraged share) is being used inside an EMI wrapper, then RM2’s advice to seek an EMI valuation is of even greater significance given the more complex nature of such arrangements.  Growth shares are very much on HMRC’s radar (and therefore also the due diligence tax accountant bloodhound!).  

RM2’s employee share plans team has established over 2,000 employee share plans over the years, and we carry out significant numbers of new awards and option grants.  Because the majority of our clients are private companies, the valuation piece is a fundamental part of the work we do.  To find out more about how to value your company in the context of a share plan, contact us on enquiries@rm2.co.uk.