Last updated on July 1st, 2020 at 10:27 am
Update 26 June 2020:
On 26 June 2020, the government announced an amendment to the Finance Bill 2020 in order to amend section 535 and Schedule 5, Part 4 of the Income Tax (Earnings and Pensions) Act 2003.
The new clause amends the rules relating to commitment of working time and disqualifying events for EMI options. The amendments are intended to ensure that:
- When calculating the employee’s committed time before granting an EMI option, any time when the employee is not required to work for reasons connected with Covid-19 is counted as working time; and
- When determining whether a disqualifying event has occurred because an EMI option holder no longer meets the working time requirements, any time when the option holder is not required to work for reasons connected with Covid-19 is counted as reckonable time.
The tax information and impact note states as follows:
“Legislation will be introduced in Finance Bill 2020 to modify Schedule 5, Part 4 ITEPA 2003 which sets out the requirement that EMI participants must meet a minimum commitment of 25 hours working time per week or 75% of working time subject to a small list of exceptions.
A new exception will be introduced at paragraph 26 at subsection (3) alongside the other list of exceptions such as injury, ill-health or disability (a) to (d) as (3)(e) which will give effect to a new time limited exception to the working time requirement for employees who are furloughed or working reduced hours because of COVID-19
The new exception above will only apply for the purposes of determining whether a disqualifying event occurs as set out in section 535 ITEPA 2003”.
This measure therefore ensures that individuals who are furloughed or who have their working hours reduced below the current statutory working time requirement for EMI as a result of Covid-19 will retain the tax advantages of the scheme.
The publication of this clause will come as a relief to many practitioners and companies that have granted EMI options, as it should give certainty regarding the qualifying status of EMI options held by employees who are currently furloughed.
Furloughed employees and EMI Share Option Schemes
As you may have read in our blog post relating to furloughed workers, a furloughed employee is still an employee, given that they remain on the company’s payroll during any period of furlough leave. This is despite the fact that in order for the employer to recover up to 80% of the furloughed employee’s wages under the Coronavirus Job Retention Scheme (CJRS), the employee cannot do any work whatsoever for the employer during the furlough period.
Given that many employers have had to take the difficult decision to furlough some, if not all, of their employees as a result of the Covid-19 outbreak, an important question has arisen as to the potential impact which furloughing employees may have on a company’s EMI share option scheme.
HMRC is, at the time of writing of this blog post, yet to announce any concessions around whether furloughing EMI option holders will amount to a disqualifying event (we will be sure to update this blog post as and when such HMRC announcements are forthcoming).
One of the statutory/legislative requirements imposed on companies wishing to grant EMI share options is that they must have fewer than 250 full-time employees. Another important question arising from this is whether or not furloughed employees (who would normally be full-time employees) count in the 250 full-time employee cap for EMI purposes. Note that there are certain situations where some workers don’t count towards this limit, for example employees on maternity, paternity or shared parental leave (as further detailed below).
Will furloughing EMI option holders amount to a disqualifying event?
The general sentiment on this question is that the act of furloughing an EMI option holder will amount to a disqualifying event. Briefly, this is because in such a case, the furloughed EMI option holder(s) would cease to meet the working time requirements for EMI options, resulting in a disqualifying event under section 535(1) (b) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”) immediately on being furloughed.
Paragraph 26(1) of Schedule 5 of the ITEPA 2003 (‘The requirement as to commitment of working time’) provides as follows: “For an individual (“the employee”) to be an eligible employee in relation to the relevant company the average amount per week of the employee’s committed time must equal or exceed the statutory threshold, that is –
(a) 25 hours a week, or
(b) if less, 75% of the employee’s working time (see paragraph 27)”.
Paragraph 26(2) then states: “The employee’s “committed time” means the time that the employee is required, as an employee in relevant employment, to spend –
(a) on the business of the relevant company, or
(b) if the relevant company is a parent company, on the business of the group”.
Paragraph 26(3) dovetails the above two paragraphs and reads: “It (i.e. committed time) includes any time which the employee would have been required to spend as mentioned in sub-paragraph (2) but for –
(a) injury, ill-health or disability,
(b) pregnancy, childbirth, maternity or paternity or parental leave,
(c) reasonable holiday entitlement, or
(d) not being required to work during a period of notice of termination of employment”.
Paragraph 26(4) confirms that references to “relevant employment” means employment either by the relevant company or, where the relevant company is a parent company, by any member of the company’s group.
Finally, paragraph 27(1) of Schedule 5 of the ITEPA 2003 (‘Meaning of “Working Time”’) provides: “In paragraph 26 “working time” means –
(a) time spent on remunerative work as an employee or self-employed person, or
(b) time which would have been so spent but for any of the reasons set out in paragraph 26(3) (a) to (d)”.
Please note that this issue has been raised with HMRC and it is expected that HMRC will publish a concession similar to the one that already exists for EMI option holders who are called up to serve as armed forces reservists.
An employee who is called up for military service as a reservist technically becomes an employee of the Ministry of Defence (MoD). However, in HMRC’s extra-statutory concessions (dated 6 April 2018), HMRC confirmed that in such circumstances they will treat such individuals as continuing to be an employee of the original employer for the purposes of all the tax-advantaged share schemes (such as EMI), including the working time requirement. In addition, the concession confirmed that if the employer or scheme organiser needs to take any action to maintain the reservist’s participation while away serving with the MoD, this will not compromise the EMI plan’s tax-advantaged status.
Do furloughed employees count towards the 250 employee limit for EMI options?
It is not clear whether furloughed EMI option holders should be counted towards the 250 employee limit, which is contained within paragraph 12A(1) of Schedule 5 to the ITEPA 2003. It is equally unclear whether such EMI option holders should be excluded from the limit as being similar to the categories of employees outlined in paragraph 12A (4)(b). For the avoidance of doubt, paragraph 12A (4)(b) of Schedule 5 of the ITEPA 2003 provides as follows: “In this paragraph references to an employee –
(a) include a director, but
(b) do not include –
(i) an employee on maternity or paternity leave, or
(ii) a student on vocational training”.
If HMRC do proceed to publish a concession similar to that for armed forces reservists (as outlined above), the concession will need to specify exactly how the concession affects both the 250 employee limit, the working time calculation and disqualifying events provisions.
In absence of any clarification from HMRC, it would in the meantime be wise to err on the side of caution and assume (for now at least) that furloughed employees do count towards the 250 employee limit.
We will update this blog post as and when HMRC publish guidance on this area.
If you find yourself in the unfortunate position of having to place some or all of your employees on furlough, please consult our template notification of furlough letter, which can be downloaded here absolutely free of charge.
EMI options: valuations
HMRC will issue valuation agreements for EMI option grants which usually last for 90 days. If Covid-19 means that there is a delay in granting EMI options, provided that there have been no changes that may affect the valuation, HMRC will treat:
- valuation agreements where the valuation was due to expire on or after 1 March 2020 as being automatically extended for a period of 30 days; and
- new valuation agreements issued on or after 1 March 2020 as being valid for 120 days.