It's good news for both employees holding share options under the Enterprise Incentive Management (EMI) scheme and their employers, the government has published draft legislation to ensure employees whose working patterns have been disrupted by COVID-19 will not be at a disadvantage under the EMI rules. HMRC had provided views on the impact of coronavirus on other tax favoured schemes such as SAYE, CSOP and SIP, but the issue of EMI was specifically deferred whilst HMRC considered the matter further.
Practitioners had been concerned that furlough, lay-off or reduced working hours could impact on the ability of an option holder to satisfy the EMI statutory working requirement. This requires that the employee must spend at least 25 hours a week (or, if part-time, at least 75% of their working time) on the business of the grantor company or one of its subsidiaries. Where an option holder ceases to satisfy this requirement, the EMI tax advantages are impacted if the option is not exercised within 90 days of the date the employee fails the working time requirement.
The legislation already provided for some events which might take an employee out of the workplace (e.g. periods of maternity leave, illness or holiday) and makes it clear that these would not result in an employee failing the working time requirement. HMRC had also historically agreed a specific concession for reservists called up for military service. The impact of COVID-19 had not been anticipated by the legislation so the government is now moving to rectify this.
New draft clauses have been added to the Finance Bill 2020 to provide an additional exemption to the disqualifying event rules to deal with coronavirus. The provision is widely drafted and covers situations not only where the employee is furloughed, but also where reduced hours are worked or leave is taken as a result of COVID-19. It applies to time out of the workplace from 19 March 2020 and will continue in force until 5 April 2021 (with the possibility of an extension for a further year if furlough continues past this date).
EMI – a tool in emerging from lockdown
Many companies are looking to protect cash flow at this time which makes increases in salaries and bonuses unattractive. For eligible companies, EMI options may be an effective alternative to assist with the retention and recruitment of employees. Valuations for shares are also falling due to the economic uncertainty and its impact on business forecasts, meaning that the exercise price for EMI options can reflect that trend.
The offer of equity participation also often helps to align the option holder’s interests with the shareholders of the company. This is particularly the case where exercise of the option is triggered by a particular business outcome (for example, satisfying a performance target or achieving an exit).
If you are considering putting in place an EMI scheme or looking at other forms of equity incentive, do feel free to contact our team to discuss. For further information, please see our briefing note here.