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Enterprise Management Incentive options (EMI)

On 29 June 2020, an amendment was published to the Finance Bill 2020 to amend section 535 and Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

The new clause has the effect of relaxing the rules relating to the working time commitment which might otherwise lead to a disqualifying event for EMI options, as a result of the coronavirus pandemic.

Background

In order to be eligible to be granted an EMI option, an employee must work for the company for at least 25 hours per week, or, if less, 75% of their working time. Any inability by an employee to meet the working time requirements will result in a “disqualifying event”. If a disqualifying event occurs, the tax treatment of an EMI option will be affected such that if it is not exercised within 90 days, the part of the option gain on exercise that arose after the disqualifying event (i.e. the market value at exercise less the market value immediately before the disqualifying event) will be subject to income tax and NICs in the same way as a non tax-advantaged option. Similarly, entrepreneurs’ relief will be lost if the option is exercised more than 90 days after a disqualifying event, or indeed if an option is exercised within 90 days following a disqualifying event that occurs within 24 months after grant.

This has led to questions among many practitioners and EMI companies as to the qualifying status of EMI options held (or proposed to be held) by employees who are currently furloughed, which can be summarised as follows:

Can a furloughed employee receive new EMI options?

When calculating an employee’s committed time before granting an EMI option, any time when the employee is not required to work for reasons connected to coronavirus is to be included in such calculation. So, any employee who is furloughed, works reduced hours or is on leave as a result of coronavirus will still qualify to receive new EMI options provided their committed time, including time when they are not required to work for their employer, is at least 25 hours per week, or, if less, 75% of their working time.

It should be noted that if a furloughed employee has been given permission take up separate employment with another employer, the EMI company will require to assess the committed time calculation carefully in order to ensure that the employee qualifies.

Is it a disqualifying event for existing EMI options if an employee is furloughed?

When assessing whether or not a disqualifying event has occurred as a result of an EMI option holder no longer meeting the working time requirements, any time when the employee is not required to work for reasons connected to coronavirus is included in the employee's “reckonable time in relevant employment”. So, any EMI option holder who is furloughed, works reduced hours or is on leave as a result of coronavirus should continue to meet both the committed time requirement in paragraph 26 of Schedule 5 of ITEPA 2003 and the reckonable time requirement in section 535(3) of ITEPA 2003, and, in turn, no disqualifying event will occur under sections 535(1)(b) or 535(2) of ITEPA 2003.

Again, it should be noted that if a furloughed employee has been given permission take up separate employment with another employer, the EMI company will require to assess the committed time calculation and the reckonable time calculation carefully in order to ensure that no disqualifying event takes place.

Comment

Please note that the above modifications have effect from 19 March 2020 and will come to an end on 5 April 2021, with a provision for HM Treasury to extend the period for a further 12 months by making regulations. This relaxation is therefore a very welcome confirmation for those companies with existing EMI option holders, as well as those who might be looking at ways to incentivise staff as they emerge from lockdown when cashflow pressures prevent other forms of employee incentivisation. Although the furlough scheme is coming to an end at the end of October, employers will have the flexibility to look at the possibility of temporary reduced working hours or other forms of leave through to April 2021 (and possibly beyond), without the risk of losing the tax advantages of EMI options.

If you require any further guidance as to the application of the above modifications, or indeed if you are an employer proposing to introduce a new EMI option scheme, or an employee proposing to exercise EMI options, please do not hesitate to get in touch with a member of our Corporate Team

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