In April this year, we published an article looking at the impact of COVID-19 on employee share schemes, in particular on Enterprise Management Incentive ("EMI") scheme share options.
In our earlier article, we noted a risk that furloughed employees with EMI options could cease to meet the working time requirement for EMI. HMRC has now confirmed that EMI option holders will not cease to meet the EMI working time requirement as a result of being furloughed, and can be granted options while taking unpaid leave, working reduced hours or while furloughed because of coronavirus.
This is a very important confirmation because if an employee with an EMI option does not meet the working time requirement, that employee would cease to be an eligible employee and an EMI disqualifying event would occur. In practice, this would mean that that employee would be forced to exercise their EMI options within 90 days of ceasing to meet the "working time" requirement, or lose the tax advantages of their EMI options.
Losing EMI tax advantages of existing EMI share options could affect both the employee (who will need to pay increased tax when shares are acquired under their EMI options) and the employer (who may need to operate PAYE when those shares are granted).
Why furlough was a concern
The working time requirement requires an employee with an EMI option or to qualify to be granted an EMI option as a result of their employment to work for their employer for an average of at least 25 hours a week, or, if less, 75% of the employee's working time.
Furloughing employees under the Government's Coronavirus Job Retention Scheme ("CJRS") means that those employees cannot work for their employer (except to participate in job training and similar activities). Whilst there are some limited exceptions to the working time requirement, such as if the employee is unable to work due to injury or ill health, there were no statutory limitations that would prevent an employee furloughed under the CJRS from ceasing to meet the "working time" requirement.
EMI and the Finance Bill 2020
Fortunately, the Government's draft of the Finance Bill 2020 now contains provisions which mean that employees with EMI options will not cease to meet the EMI working time requirement (and so will not trigger a disqualifying event) as a result of being furloughed under the CJRS, taking unpaid leave or working reduced hours due to COVID-19. Initially, this amendment will apply from 19 March 2020 to 5 April 2021, but could be extended for an additional 12 months.
HMRC has also confirmed that it will accept that, from 19 March 2020, if an employee with EMI share options granted before that date would otherwise have met the working time requirement but did not do so for reasons connected to the coronavirus pandemic, the time which they would have spent on the business of the company will count towards their EMI working time.
The Government's amendments will allow employees furloughed under the CJRS, on unpaid leave or working reduced hours due to the coronavirus to qualify for the grant of EMI share options.. As we discussed in another previous article, now may be a good time for employers to set up EMI schemes. It is worth noting that the Government's changes to the working time requirement changes the definition of eligible employees for prospective EMI options holders. As a result of the proposed changes, employers who grant annual EMI awards or wish to set up a new EMI share scheme may be able to include furloughed employees within the annual EMI awards or the grant of new EMI options to provide an incentive for those employees. Whether this would be advisable would depend on the circumstances of the employer, but it should be borne in mind as a possibility.
The DWF Tax Team has significant experience in advising on and establishing a variety of employee share schemes, including EMI schemes. Please contact James Cashman or your usual DWF contact if you would like to discuss the implications of establishing a new share scheme for your employees.
Authors: James Cashman, John Toon, Caroline Colliston and Alex Tolcher.