What HMRC actually wants from an EMI share valuation

HMRC focuses on Actual Market Value, commonly referred to as AMV. In plain English, this is the price a willing buyer and seller would agree for the shares at the grant date, with both parties having full knowledge of the relevant facts and neither being under any compulsion to transact.

That sounds straightforward until you think about what it actually means for a private company with a complex share structure. HMRC is not asking for a broad company valuation. It wants the value of the specific class of shares being optioned, after accounting for those shares’ actual rights, restrictions, and minority status. Those shares may carry limited voting rights, weak dividend entitlement, and strict transfer restrictions. An employee holding a small minority stake has no control over the business and no easy route to sell. All of that affects what a notional willing buyer would actually pay.

So the process typically has two distinct layers. First, you establish the enterprise value of the business as a whole. Then you allocate value across the share classes and adjust for the specific features of the shares being optioned. Jumping from a headline company value directly to a per-share number, without working through those two steps carefully, is where many founders go wrong. Our HMRC share valuation service covers both layers as part of every engagement.

HMRC also expects internal consistency. The valuation should align with the cap table, the articles of association, recent transactions, the latest financial data, and the current stage of the business. If those pieces do not fit together coherently, the valuation becomes difficult to defend if it is ever questioned.

Why your latest funding round is not the whole answer

A recent funding round is useful evidence for an EMI valuation. It is real, arm’s-length market evidence of what sophisticated investors were prepared to pay for shares in the business at a specific point in time. For that reason, it carries genuine weight with HMRC. But it is rarely the complete answer, and treating it as one is one of the most common mistakes founders make.

The core problem is that investors almost always buy preference shares, not ordinary shares. Those preference shares typically carry liquidation preferences, anti-dilution protections, preferred dividend rights, and other structural protections that make them more valuable than ordinary shares in many scenarios, particularly in downside or moderate-outcome cases. The price investors paid reflects the value of those protected rights, not the value of ordinary EMI shares with weaker economic entitlements.

Timing also matters. A round completed six or more months ago may be less persuasive if trading has moved materially, forecasts have changed, or a significant contract has been won or lost since completion. HMRC will look at what was known at the grant date, not what was true at the last round date. If the business has grown significantly since the round, the old round price may understate current value. If performance has deteriorated, HMRC will not accept the old figure simply because it was market-tested at a different point.

In practice, the right approach is to treat a recent arm’s-length round as a starting point, then work through what rights were purchased, how those differ from the ordinary shares being optioned, and what has changed in the business since the round closed. A proper business valuation takes all of this into account rather than simply applying the post-money valuation as a proxy.

How share rights and restrictions change the value

Share rights shape economic value in ways that are easy to overlook when you are focused on the headline company valuation. If the shares under option carry limited or no voting rights, restricted dividend entitlement, compulsory transfer provisions on leaving employment, or tight restrictions on when and how the shares can be sold, a willing buyer in the open market would typically pay less for them than for unrestricted shares with full economic and voting rights.

HMRC looks at these real-world features carefully. Ordinary shares subject to compulsory transfer on leaving, for example, create genuine uncertainty for a holder: if they leave the company before an exit, they may be obliged to sell at a price determined by the articles rather than the market. That risk has a value impact. Drag and tag provisions matter in a different way: they affect the circumstances in which a holder can ultimately realise value, and HMRC will consider whether and how they apply to the shares being optioned.

This is why the articles of association and any shareholders’ agreement are among the most important documents in the valuation process. Two companies with identical revenue and profit can reach meaningfully different EMI valuations if their share structures differ significantly. A company where all shares carry equal economic rights will produce a different per-share value from one where investor shares carry substantial liquidation preferences that absorb value in exit scenarios below a certain threshold.

The valuation methods HMRC expects to see

There is no single prescribed formula for every EMI valuation. The right method depends on the business model, the stage of growth, the quality of the financial information available, and whether there has been a recent arm’s-length transaction that can anchor the analysis. What matters most to HMRC is that the chosen approach is applied consistently, the logic is explained clearly, and the conclusion can be traced back to evidence.

Earnings-based methods

Earnings multiples suit established trading companies with stable, maintainable profits. The approach involves identifying a sustainable level of earnings, applying a multiple that reflects what a buyer in the relevant market would pay for that earnings stream, and arriving at an enterprise value. This method works well when profit is a reliable signal of business quality and when comparable transaction or market data can support the chosen multiple.

Revenue-based methods

Revenue multiples are more common for high-growth SaaS and technology businesses where current profit may be low or negative because the business is investing heavily in growth. In these cases, revenue, and particularly recurring revenue, gives a better signal of underlying value than a depressed or negative EBITDA figure. The chosen multiple needs to reflect comparable market data and the company’s specific growth profile, retention, and gross margin. Our guide to SaaS business valuations covers how revenue multiples are applied in practice for software businesses.

Net asset value

Asset-based methods are most relevant for asset-backed businesses, property-heavy groups, or investment structures where the underlying asset value drives business value more directly than earnings or revenue. For most trading SMEs and growth businesses, net asset value on its own is unlikely to capture the full picture, but it can serve as a useful cross-check or floor value.

For most SMEs, the best answer comes from considering more than one approach, explaining which carries the most weight and why, and producing a conclusion that can withstand a direct question from an HMRC inspector or a diligence team. A good valuation report includes a clear bridge from whole-company enterprise value through to the per-share figure for the specific class of shares being optioned.

How minority discounts are applied to employee option shares

A minority discount reflects a straightforward economic reality: a small, non-controlling shareholding is usually worth less per share than a controlling stake in the same business. A minority holder cannot direct company strategy, force a dividend, compel a sale, or control when and how value is distributed. In most private companies, there is also no liquid market for the shares. Those limitations have a real impact on what a willing buyer would pay.

For EMI option shares, which are almost always small minority stakes with no control and restricted transferability, a minority discount is often appropriate. However, the size of the discount needs to follow the facts of the specific situation rather than simply maximising a tax-efficient outcome.

HMRC scrutinises aggressive discounts carefully, particularly in two circumstances: when the company is approaching a liquidity event such as a sale or IPO, and when there has been a recent funding round that provides direct evidence of what a willing buyer paid for the shares. If an exit is near and the shares are likely to convert into cash at a predictable price within a short timeframe, the minority discount may be substantially reduced or eliminated, because the lack-of-marketability argument weakens considerably when a market is about to be created.

A material discount can be well-supported when the ordinary shares carry weak economic rights, tight leaver provisions, and no clear liquidity path. A discount applied primarily to reduce the option exercise price to a founder-friendly level, without clear factual support, is the kind of thing that creates problems when HMRC or investors look closely at the historic cap table.

The step-by-step EMI valuation process

A well-run EMI process protects the company, the employees receiving options, and the directors approving the grant. It also reduces the risk of having to revisit the work under time pressure later. Most problems come from rushed decisions made at the wrong point in the sequence.

• 1
  Check scheme eligibility first. Before preparing any valuation, confirm the company qualifies. That means checking the trading company test, gross assets, employee headcount, group structure, and whether each employee being granted options meets the qualifying conditions. A strong valuation will not fix an ineligible grant. Eligibility checking should happen before any other work begins.
• 2
  Gather the full evidence pack. Collect the cap table and full share history, articles of association and shareholders’ agreement, latest statutory accounts, current management accounts, financial forecasts with clear assumptions, details of recent share issues or fundraising documents, board minutes, and any group structure information. Incomplete packs slow the process and create gaps that HMRC may later question.
• 3
  Prepare the valuation report. Build the analysis from whole-company enterprise value through to per-share value for the specific class of shares being optioned. Document the method chosen, the evidence supporting it, and the logic for any minority discount applied. The conclusion should be traceable from first principles.
• 4
  Submit to HMRC for advance agreement (recommended). Most companies use form VAL231 with supporting documentation to ask HMRC Shares and Assets Valuation to agree the AMV before the options are granted. This is not mandatory but it is strongly advisable. An agreed value gives the board a figure it can rely on and removes the risk of a later challenge on the price.
• 5
  Move quickly once agreement is reached. HMRC advance agreement is commonly treated as valid for 90 days from the valuation date. If a funding round, material contract, or other value-changing event occurs before the options are granted, the agreed figure may no longer be usable and the process may need to restart.
• 6
  Grant properly and report on time. Get board approval in place, issue the option agreements, and complete the HMRC reporting requirements for the grant. Late or missing returns create unnecessary exposure and are straightforward to avoid with good process.

The 2026 rule changes and what they mean in practice

From 6 April 2026, the qualifying conditions for EMI widened in several meaningful ways. More scale-ups now fall within the scheme, and the time horizon for long-dated options has extended significantly. For companies that were previously just outside the EMI limits, these changes are worth reviewing urgently.

The gross assets increase is the most significant change for growing businesses. Companies that previously exceeded the £30 million threshold and were forced outside EMI can now reconsider whether the scheme is available to them. The extended exercise window of 15 years also gives companies more flexibility to design long-dated option programmes for senior hires without the vesting schedule being constrained by a 10-year exercise deadline.

One thing has not changed: the valuation standard. Wider access to EMI does not mean less rigour on pricing. HMRC still expects a robust, evidence-based AMV for the specific shares under option. Founders who assume that the relaxed qualifying conditions signal a more relaxed approach to valuation are likely to find otherwise if the scheme is ever scrutinised.

One additional date to note: HMRC has confirmed that the grant notification process is due to simplify from 6 April 2027, with reporting moving into the annual year-end return. Until that change takes effect, the current grant-by-grant notification requirements continue to apply. Do not assume the 2027 change already applies to grants made in the current tax year.

The mistakes that cause the most problems with HMRC

Most EMI valuation problems do not start with complex technical theory. They start with rushed decisions, stale numbers, or poor paperwork. The consequences can be significant: tax exposure for employees, complications in a fundraise or sale when investors probe historic cap table entries, and HMRC enquiries at moments when the management team has neither the time nor the appetite to deal with them.

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  Using the post-money valuation as a direct proxy. Lifting the latest funding round figure without adjusting for share class differences or changes in trading since the round is one of the most common and most easily challenged shortcuts.
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  Reusing an old valuation after the business has changed materially. A valuation agreed 18 months ago is not automatically usable today if revenue has doubled, a major contract has been won, or a new funding round has completed.
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  Applying an aggressive minority discount without factual support. Discounts need to follow the economic reality of the shares. An aggressive reduction applied primarily to minimise the exercise price, without clear justification, will not survive HMRC scrutiny.
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  Missing eligibility checks before the grant. Focusing on the valuation number and overlooking the gross assets test, employee count, or trading company test creates a situation where the whole scheme is invalid regardless of how accurate the pricing was.
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  Granting after a value-changing event without refreshing the valuation. Completing a funding round and then granting options using a valuation prepared before the round, on the basis that the advance agreement has not formally expired, is a risk that creates questions later.
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  Late or missing HMRC grant notifications. The current reporting requirements for each grant are straightforward but time-sensitive. Missing the deadline creates unnecessary exposure that is entirely avoidable with proper process.