The Commission originally authorised the scheme in 2009, but approval expired on 6 April, leaving UK businesses in a state of limbo. The slowness of the decision means that HMRC is yet to clarify guidance.

In outline, the EMI options scheme enables companies with qualifying trading activities and gross assets of £30m or less to grant their employees share options up to the value of £250,000 each over a three-year period, subject to certain other restrictions and requirements. Under the scheme, employees of SMEs will benefit from reductions from income tax and/or national insurance contributions, when exercising their share options.

In 2015/16, options were granted over shares worth £380m under this scheme to 23,000 UK employees, up from £310m the year before.

The Commission's latest assessment found that the prolongation of the measure is necessary to help UK SMEs attract and retain talented and skilled personnel. It also found that the measure contains a number of safeguards, such as a cap on the value of the share options that can be subject to the tax advantage both at the employee and employer level, ensuring that potential distortions to competition are limited.

On this basis, the Commission concluded that the measure is in line with EU state aid rules and granted an extension which is valid until the UK ceases to be a member state.

Georgina Holloway, tax manager and share incentives specialist at Menzies, said: ‘This will be a relief for many small and growing businesses that value their EMI schemes and want to continue to use them to attract and retain key employees.

‘While we expected HMRC’s application under the EU state aid rules to be successful, it is unfortunate that small and growing businesses have been kept waiting for clarification. Without state aid approval in place, many did not feel confident granting new share options until they could be certain that current tax advantages would apply.

‘This development restores certainty and means employers can continue to use EMI schemes to motivate and retain their staff.’

EU state aid approval for EMI schemes operating in the UK is only expected to run until the UK leaves the EU, or at the end of any transition period. At that point, the UK government could review the existing EMI scheme and potentially consider extending it further.

Holloway said: ‘It is even possible that HMRC could relax current criteria after Brexit. For example, the scheme could be extended to larger companies, with 250 employees or more, or individuals could be allowed to hold share options with a larger value, above the current cap of £250,000.

‘Without a requirement to secure EU state aid approval, share incentive schemes could be re-designed or amended to meet the needs of employers and to help them in tackling skills shortages within their industries.’

David Scott, partner in the tax team at Harbottle and Lewis, said: ‘We have various clients who had to put EMI options on hold and we feared it would take longer than this for the EU to grant their approval.

‘We are still waiting for the details of the actual EU decision and HMRC has not issued a statement yet so we would urge a degree of caution in actually implementing new EMI option grants for now. However, we can now start work helping clients to prepare for granting EMI options again.’

Report by Pat Sweet