Until now, the impact of furlough leave on Enterprise Management Incentive (EMI) options has been of significant concern to many EMI option holders affected by COVID-19.
However, in welcome news, the Government has recently published amendments to the rules governing EMI to confirm that EMI option holders who have been furloughed, or who have had their working hours reduced as a result of COVID-19, will not lose the tax benefits of EMI.
Under EMI legislation, in order to qualify for EMI and the tax advantages attached, an employee must satisfy (amongst other things) the “working time requirement”; that is, the employee must work at least 25 hours for the company in question or, if less, 75% of the employee’s total working time must be spent working for that company.
If these qualifying requirements are no longer met during the course of employment, then there is a “disqualifying event” for the purposes of the EMI options, causing the employee to lose the tax benefits of EMI (which, in many cases, often carry significant value).
Without the Government’s intervention, an employee who has been furloughed would no longer be working 25 hours a week, and as such, the employee would be disqualified from EMI and the tax advantages. Likewise, if an employee’s hours were reduced, and they got another job, then they would likely breach the requirement to spend at least 75% of their working time within the company that granted the EMI options.
Whilst it had been acknowledged for some time that these consequences could be significant for EMI option holders, the Government has now clarified its position by publishing new draft clauses amending the EMI rules to address the issue.
Under the Finance Bill 2020, EMI legislation will be amended to prevent a “disqualifying event” arising where an option holder does not meet the working time requirements for reasons connected with COVID-19. As such, employees who have been furloughed, or have had their working hours reduced as a result of COVID-19, during the period from 19 March 2020 – 5 April 2021, will not lose the tax benefits of EMI. It is possible that the Government may also extend that time limit to 5 April 2022.
Although the amendments had been widely anticipated, the news will be a welcome development for EMI option holders whose working hours have been impacted by COVID-19. The update provides much-needed clarity, for both EMI option holders and companies alike.
For information on EMI options more generally, see our explanatory article here: www.leathesprior.co.uk/news/emi-share-options-a-cost-effective-way-to-incentivise-employees.
If you would like to discuss any of the points raised in this article further, please get in touch with our Corporate & Commercial Team at Leathes Prior on 01603 610911 or by email.
Note: The content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any specific circumstance.