A Guide to HMRC Valuations

HMRC valuations

Author: Scarlett Pierce
Read time: 4 minutes
Published date: October 12, 2022

What's an HMRC valuation, when is it needed, and how is it done? Find answers to these questions and more in Carta's guide to HMRC valuations.

Contents:

What’s an HMRC valuation?

An HMRC valuation is the umbrella term for a company valuation approved by HMRC, for the purpose of issuing option grants under an EMI, CSOP or SIP scheme in the UK. The valuation determines the share price at which your company issues options to its employees.

Do I need an HMRC valuation?

HMRC valuations are not mandatory, technically speaking. You can set up an EMI scheme and issue employees equity without an HMRC-approved valuation, but it’s not advised. Ideally, you should obtain a company valuation at the point of setting up your employee share ownership plan (ESOP), before you begin issuing option grants.

When do I need an HMRC valuation?

In order to issue option grants, you need to determine the company valuation and the price per share.

If you’re planning to issue option grants to your employees – as opposed to awarding company shares outright – you should set up an ESOP. There are a number of schemes in the UK that offer tax advantages to companies and employees who participate.

What’s the difference between EMI & CSOP?

From the perspective of a company valuation, there’s no difference between EMI and CSOP. The valuation is performed in the same way and approved by HMRC in the same way. However, the schemes differ in terms of how they operate and who qualifies.

Enterprise Management Incentive – EMI

HMRC introduced the EMI scheme to encourage companies to grant share options to their employees. The scheme offers significant tax advantages to both companies and the employees awarded share options.

Under EMI, companies can award options worth up to £250,000 to eligible employees who must be employed full-time with the business. There are limits to the scheme, as businesses must have gross assets under £30 million and employ fewer than 250 people full-time. Specific industries are also disqualified from EMI, including banking, insurance, legal services, and accountancies.

Company Share Option Plan – CSOP

For companies that don’t meet the criteria for EMI, there’s CSOP, another HMRC-sponsored scheme. The tax treatment is broadly similar to EMI, but the award limits are much lower.

However, from April 2023, the upper-value limit on CSOP will increase from £30,000 to £60,000 per person – an important development that will effectively double the scheme’s strength as an employee incentive.

What is HMRC pre-clearance?

Pre-clearance is the term used by HMRC for approval of your company valuation. You don’t need to secure pre-clearance from HMRC to issue option grants to your employees, but doing so has its benefits.

For your employees: pre-clearance ensures your employees aren’t subject to high tax rates in the future. EMI options, for example, are taxed at just 10% CGT upon exercising.

For your company: similar tax issues are avoided by pre-clearance, as are additional national insurance contributions.

When does an HMRC valuation expire?

Once approved by HMRC, your company valuation is valid for 90 days or until a significant event occurs. Significant events include:

Once it expires, you must apply for a new one using updated company information.

What do I need for an HMRC valuation?

A range of financial information is used to determine your company valuation, whether you’re performing it in-house or through a provider such as Carta. We ask customers to provide the following inputs:

Company details

Financial information

Qualitative information

How long does an HMRC valuation take?

Once you’ve supplied the company information needed, Carta can perform an EMI or CSOP valuation in three to five business days. We’ll then deliver the initial report for your review, and you’ll have the chance to raise queries or seek clarification from our in-house valuations analysts.

After you've approved the report, we’ll file it with HMRC on your behalf, along with a VAL231 filing for EMI schemes.

EMI & CSOP valuations with Carta

Let Carta solve the pain of EMI and CSOP valuations for you, with our cost-effective Grow and Scale packages that include unlimited valuations on demand. Our expert analysts work with your data to deliver valuations quickly and accurately. We’ll even liaise with HMRC for you, and handle any negotiations with them so you don’t have to.