On 21 July 2020, HMRC published draft legislation proposing changes to the working time requirements for Enterprise Management Incentive (EMI) share options. The purpose of the changes is to allow EMI options to be granted to individuals who were furloughed or whose working time was reduced due to Covid-19.
Since introduction by the government in 2000, EMI share options have been and continue to be an extremely popular and tax efficient way of granting share options to employees of a business (government figures report that 34,000 employees were granted EMI options in 2018/2019 alone).
What is an EMI option?
An EMI option is an employee benefit designed to assist in recruiting and retaining employees. An option gives an employee a right to acquire shares in their employer at a future date. The value at which the shares can be bought is agreed at the time of the grant of the option. Provided that both the employee and the company satisfy the statutory rules, an EMI Option is an extremely tax efficient way of rewarding employees.
The working time qualification
One of the key qualifying criteria for an individual to qualify to receive an EMI option is that:
they must be an employee of the company (or a qualifying subsidiary) working 25 + hours per week, or
if the employee works less than 25 hours per week they must spend 75% of their working time working for the company.
If someone ceases to meet the working time criteria after the grant of an EMI option, this counts as a “disqualifying event” under the rules. This means that the tax benefits of the scheme are lost if the option is not exercised within a very short period of time. In many cases, in this scenario, exercising the option is simply not possible and the right to exercise the share option is lost.
The impact of furlough
In the current climate with vast numbers of employees being placed on furlough or reduced hours, there has been concern that thousands of option holders would cease to qualify and would lose their hard-earned share options and associated benefits.
The proposed new legislation contained in the Finance Bill 2020 is designed to address this issue by a temporary adjustment to what counts as a “disqualifying event”. The intention is to:
allow new EMI options to be granted; and
allow for the tax benefits to be retained for existing EMI options
in each case even where the relevant employees have failed to satisfy the working time criteria because of the Coronavirus pandemic.
Based on current draft legislation, the adjustments to the scheme will be time-limited. So, if an employee has not met the working time requirements between 19 March 2020 and 5 April 2021 due to Covid-19, the time that they would have spent working for their employer will count towards their working time for the purposes of the EMI scheme.
The proposed changes are expected to have very little impact on government tax receipts but will be a welcome relief to employees with share options!
We’re here for you
If you need advice in connection with an existing share option scheme or new share scheme, please contact a member of the Corporate Commercial Team.