Enterprise management incentive options (EMI options) are a type of share option commonly granted by companies looking to retain key employees through equity interests. Kerry Southworth, solicitor and corporate law specialist, reviews these options which are subject to strict statutory guidelines, in light of the COVID-19 crisis.
EMI options are popular amongst many companies due to the tax reliefs and exemptions afforded to employees, including income and capital gains tax reliefs.
Due to these favourable tax treatments, EMI options are subject to strict statutory guidelines. The guidelines limit the number of employees eligible to receive EMI options, restrict the value of shares over which the options can be granted and place strict rules on the company and employees for the duration of the scheme.
The working time requirements for an EMI option
There are currently two ways in which an employee can satisfy the working time requirements for an EMI option. These two statutory requirements are:
- The employee spends on average, at least 25 hours a week, on the business of the company granting the EMI option, or any associated group company.
- The employee spends, on average, less than 25 hours a week on the business of the company granting the EMI option, or any associated group company, provided that such activity makes up on average at least 75% of the employee’s working time if they are also self-employed or additionally work elsewhere.
Absences from work for reasons including ill-health, parental leave, reasonable annual leave or garden leave are included in these calculations. However, absences for other reasons, including a sabbatical or extended leave, may mean that the employee falls outside of these thresholds, and therefore does not meet the working time requirements.
What does ‘disqualifying event’ mean?
When an employee or company fails to meet these statutory requirements, this is known as a disqualifying event. In this situation, the option may continue, however it may not benefit from the favourable tax treatment previously afforded.
If the option is exercised more than 90 days after the disqualifying event, any increase in market value of the options which occurs after the disqualifying event will be subject to income tax and national insurance contributions in the same way as non-tax advantage options.
In addition, entitlement to entrepreneur’s relief for a disposal of the shares will only remain if the disqualifying event occurs more than two years after grant and the option is exercised within 90 days. Outside of this, any disposal will be subject to the rules of capital gains tax.
How does COVID-19 impact an employee’s compliance with the EMI scheme?
During the COVID-19 crisis, Harrison Drury has assisted many companies in utilising the Coronavirus Job Retention Scheme (CJRS), which placed employees on a prolonged period of furlough. Under the terms of the CJRS, employees were not permitted to do any work for their employer until 1 July, 2020.
Since 1 July, 2020, furloughed employees have been permitted to return to work on a part-time basis whilst still having a portion of their wage covered by the CJRS.
This would undoubtedly have an impact on an employee’s average working time for the company, and could affect their compliance with the working time requirements of an EMI scheme. Given the number of employees being placed on furlough across the country, it seems likely that a number of these will be EMI option holders. HMRC was therefore required to offer clearer guidance as to the impact of the COVID-19 crisis on these options.
Given the intentions of an EMI scheme, as well as CJRS, it seemed unusual that an employee placed on furlough would lose entitlement to the favourable tax treatment under a scheme which is supposed to incentivise them to stay with the company.
On 26 June, 2020, the government finally provide clarity on this issue and tabled an amendment to the Finance Bill 2020. This amendment confirmed, that any time, when the employee is not required to work for reasons connected with COVID-19, is counted as working time and therefore does not affect compliance with the working time requirements.
Whilst the Finance Bill 2020 has not yet received assent, it is expected that this clarity will soon form part of the EMI rules.
As businesses start to recover from the COVID-19 crisis, it is important to consider the indirect impact EMI rules may have had on existing corporate and commercial agreements. If you have employees on the EMI scheme, or wish to seek general advice regarding your business contracts and agreements, contact Kerry Southworth from Harrison Drury’s corporate team on 01772 258321.