The government has published proposed amendments to the Enterprise Management Incentive (EMI) rules, following earlier promises by HMRC that it would explore technical issues raised in relation to coronavirus and EMI options.
The new clause has been included in the Finance Bill, which is currently going through its parliamentary stages. It will become law when Royal Assent is given, which is expected in the coming weeks.
Working time requirement
On 8 June 2020, HMRC in its bulletin on employment-related securities – which covered the impact of coronavirus on tax-advantaged share plans – said it would explore issues raised in relation to coronavirus and EMI options, in particular the "working time" requirement.
EMI option holders are required to meet the working time requirement. This requires that they work 25 hours per week (or if less, 75% of their working time) on the business of the EMI company or group.
In the absence of clarification from HMRC, there was concern that an EMI option holder who is placed on furlough would cease to meet the working time requirement. This would trigger a disqualifying event and change the tax status of the EMI option.
On 29 June 2020, a new clause was published for inclusion in Finance Bill 2020, together with notes that contain the following confirmation:
"HM Revenue & Customs accept that, from 19 March 2020, if an employee with share options granted before that date would otherwise have met the scheme requirements 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 working time."
The new clause provides that a disqualifying event does not occur as a result of the EMI option holder not being required to work for reasons connected with coronavirus disease. This includes:
- taking unpaid leave because of coronavirus;
- being furloughed under the Coronavirus Job Retention Scheme; or
- working reduced hours due to coronavirus.
It is a time-limited exception, effective from 19 March 2020 until 5 April 2021. HM Treasury will have the power to extend the exception for a further twelve months by regulations, if necessary.
Osborne Clarke comment
This is clearly a welcome development, providing some certainty for furloughed EMI option holders concerned about possible loss of EMI tax relief.
It is helpful that the drafting of the clause extends beyond furlough, to include EMI option holders who are on unpaid leave or working reduced hours due to the pandemic.
There are some points for companies operating EMI plans to watch, as there are a few ambiguities between the clause and accompanying notes.
HMRC's intention seems to be that this exception applies to EMI options granted before 19 March 2020, so the drafting of the clause (as enacted) will need to be considered carefully. Any companies that have included employees who have been placed on furlough in a recent round of EMI grants (or companies that are proposing to include such employees in a future round) should take advice on the specific circumstances.
We expect that the HMRC Manuals will be updated and a further Employment Related Securities Bulletin issued (setting out HMRC's final guidance on the new measure), which would be published here.
Please get in touch with your usual Osborne Clarke contact or one of the experts below if you have any queries or would like to discuss further.