July 1, 2020
Further to Wiggin’s previous update regarding the impact of Covid-19 on Enterprise Management Incentive plans (EMI), HMRC have tabled amendments to this year’s Finance Bill to allow a relaxation of the working time requirement to accommodate furloughed employees.
To recap, the working time requirement for EMI prescribes that if an EMI option holder fails to satisfy the requirement that they work 25 hours a week, or at least 25% of their working time if less, during the life of their option then that will normally be a “disqualifying event” denying them the tax benefits unless they were to exercise the option within 90 days. It was anticipated that furlough could constitute a disqualifying event for these reasons, since option holders on furlough would no longer be satisfying the working time requirement.
HMRC’s new concession provides that if an employee with options under an EMI scheme is furloughed, then that will not create a disqualifying event and their options will remain valid. The time they would have spent working for the company while furloughed will now count towards their working time. See further details here. This amendment is to apply with effect from 19 March 2020 until 5 April 2021 (and can be extended by regulation to 5 April 2022). Our analysis is that the new measure could also provide relaxation for an employee who may be subject to the flexible furloughing which has more recently been introduced (i.e. where employees are able to take on additional work or second income). The impact of the second income on the EMI qualification is not explicitly addressed by HMRC however and therefore specific advice should be sought on the circumstances prior to the issue of new EMI options to those on furlough or who have previously been furloughed.
As we have said in our previous bulletins, the present time may well be a good time to grant EMI options while the share value of the company is low – particularly since HMRC have recently extended the time limit for validity of their approval to a company’s share valuation to 120 days so as to factor in delays as a result of Coronavirus which may have been experienced by companies operating EMI schemes (see our earlier bulletin here). If a company were to grant options now to a furloughed employee, they will need to consider not only whether the option is being granted to incentivise the individual but whether that employee is eligible. The amendments to the Finance Bill (and the HMRC accompanying policy notes) were prefaced by the statement that the modifications apply for the purposes of determining whether a disqualifying event has occurred. Notwithstanding this, the amendments themselves might permit a furloughed employee to be treated as satisfying the working time commitment for the purpose of ascertaining his eligibility on the day of grant. Again, specific advice should be sought so as to be certain that any such employee’s options would satisfy EMI criteria and attract the tax advantages.
Please do contact the team at Wiggin if you require further advice on any aspect of share incentivisation, including share option schemes and growth share planning.