ACCA Advanced Taxation (ATX) Practice Exam

What is an exception to there being no tax charged on exercise for tax advantaged share option schemes?

1. All options are tax-free

2. EMI schemes may have an income tax charge if options are issued at a discount

3. Only share options issued after a specific date are taxable

4. Options cannot be exercised in the first year

The correct answer is: EMI schemes may have an income tax charge if options are issued at a discount

The correct answer highlights a significant aspect of the Enterprise Management Incentive (EMI) schemes in the context of share option taxation. Under normal circumstances, tax-advantaged share option schemes do not incur any tax liability at the point of exercise. However, EMI schemes have specific rules regarding the pricing of the options. If the options are granted at a discount to their market value, this can trigger an income tax charge on the individual when they exercise those options. This is key because the intent behind EMI is to encourage and reward employees without immediate tax implications when options are exercised. However, the condition regarding the issuance price introduces a potential tax liability that can be critical for both employers and employees to consider. It underscores the importance of structuring share options correctly to maximize tax efficiency. In contrast, the other options suggest scenarios that do not align with the prevailing rules regarding tax implications for tax-advantaged share option schemes, such as all options being tax-free without exception, or specifying timeframes and restrictions on exercising options that do not inherently relate to tax charges.