Due to the fast pace of change in regulation resulting from the COVID-19 pandemic, we strongly recommend that professional advice is sought in connection with the issues discussed in this article before any action is taken.
The Government has established the Coronavirus Job Retention Scheme ("JRS"). Under the JRS, employers can furlough employees and claim up to 80% of the furloughed employees usual monthly wage costs, up to £2,500 per month, plus associated employer national insurance contributions and minimum automatic enrolment pension contributions.
If employers take advantage of the JRS, it is important that they consider what impact furloughing employees may have on options granted under any existing employee share schemes (including tax advantaged share schemes like EMI or CSOP schemes).
The importance of the scheme rules
Many share scheme rules, including those for EMI schemes, as well as some options granted under CSOP schemes, will include employment or "working time" requirements which must be satisfied for the option to continue without lapsing or to ensure that it doesn't lose the tax advantaged status.
It is important that share scheme rules are properly reviewed before furloughing employees holding share options to ensure that those share options do not inadvertently lapse as a result of furloughing. If a share option lapses this will usually result in the option being lost, together with any associated tax advantage.
Share option schemes may also include other rules that may be breached, directly or indirectly, as a result of employees being furloughed. For example, SAYE schemes will require an employee to make regular payments into the scheme. Under particular scheme rules, these may be required to continue during the furlough period, even if an employee is on a lower salary. If an employee fails to make payments under the SAYE scheme, this could be problematic depending on the rules of the scheme.
An extra issue for EMI schemes
The rules relating to EMI share options contain a statutory "working time" requirement. If the statutory "working time" requirement ceases to be met in respect of an EMI share option, this is treated as a "disqualifying event" and can result in the loss, or partial loss, of any tax advantage connected with the relevant EMI share option.
Our initial analysis suggests that the risks associated with furloughing an employee with EMI share options will depend on the nature of that employee's employment and employment contract. Each case should be assessed separately to properly ascertain the risks posed by furloughing employees.
We consider that whilst the employees are not actively working for the employer they are still retained by the employer and could be called upon to work, if required, and brought out of furlough. Accordingly, it would seem unreasonable that due to no fault of their own an employee's share option might lose its tax advantaged status.
It is hoped that HMRC provide some guidance on the application of EMI "working time" requirement to furloughed employees, or publish an extra-statutory concession dealing with any "working time" issues caused. From what we understand, HMRC is aware of this issue, but have not yet issued any guidance in response to it. For now, it is important that the rules are reviewed carefully and any risks considered before the decision is made to furlough an employee holding share options.
Please contact James Cashman or your usual DWF contact if you would like to discuss the impact of the new Coronavirus Job Retention Scheme on your existing employee share schemes, or the implications of establishing a new share scheme for your employees.