The Government has tabled amendments to the Finance Bill which confirm that an employee being placed on furlough is not a disqualifying event for those who hold EMI options.
The changes will come as a relief to many companies and employees who were concerned that furlough could amount to a disqualifying event.
One of the conditions for employees granted EMI options is that they must satisfy the statutory working time requirements. An employee with an EMI option must work:
Inability to meet one of these thresholds is a disqualifying event under the EMI legislation, meaning that the option must be exercised within 90 days of this event or cease to have tax advantage status.
Employees placed on furlough leave under the Government’s Job Retention Scheme, are prohibited from working for their employer whilst on furlough. Clearly, therefore they will not be able to satisfy the minimum 25 hours required to qualify EMI options.
At first sight it might appear that as employees on furlough would be undertaking no work at all, they would be able to satisfy the 75% condition, however case law relating to other share schemes suggested that this argument may not be accepted.
It was expected that HMRC would issue a concession relating to furlough leave, however after extensive requests for guidance by a number of bodies around the treatment of furlough leave, they had provided no clarification on how this would impact EMI option holders.
This left both companies and employees with EMI options in limbo as to whether there had been a disqualifying event for EMI options, with the 90 day deadline for exercising the option fast approaching.
The Government has now stepped in and published a series of amendments to the Finance Bill which will introduce a number of changes to the EMI legislation in order to address those employees who have been placed on furlough leave who hold EMI option. Alongside the new clauses, there has also been an explanatory note to the new clause, explaining how the changes will affect EMI option holders.
In summary, the short term changes mean that placing an employee on furlough is not a disqualifying event for EMI option purposes. There are also a number of other consequential amendments to the legislation to allow these changes to take effect.
Time not required to work because of COVID-19 is discounted
The Finance Bill will introduce a new exception to the working time requirements, whereby any time “not being required to work for reasons connected to coronavirus” will not count towards working time for EMI purposes, allowing those on furlough to meet the working time requirements.
The explanatory note confirms that this is wider than just employees on furlough, also covering those taking unpaid leave, or those who are working reduced hours because of coronavirus, ensuring they will not suffer a disqualifying event.
Any time that falls within this exception will count as “reckonable time in relevant employment” for calculating whether a disqualifying event has taken place for an EMI option holder. This ensures that those affected by the pandemic do not suffer a disqualifying event and employees are not forced to exercise their option because of being on leave.
This is a welcome addition to the EMI legislation and provides certainty to all those involved in EMI plans after growing concern that this would not be provided.
How long is this for?
The changes proposed by the Finance Bill are only intended to be a short term measure in response to COVID-19. The Bill provides that the changes will only apply for time between 19 March 2020 and 5 April 2021, when the modifications outlined above will come to an end. There is a power in the Bill for this period to be extended for a further 12 months if the pandemic has not passed.
This ensures that past events to furlough or take leave will be covered by the exception, hopefully ensuring that almost all EMI option holders who have been affected by the coronavirus, do not suffer further hardship by having to exercise their options while economic conditions are still uncertain. The ability to extend this exception is welcomed, hopefully preventing a similar panic if the pandemic has not passed by next April.
The changes, once passed, will provided much needed certainty to companies who have granted EMI options and have been effected by the pandemic. They will allow those who are or have been on furlough, or have been working reduced hours who hold EMI options clarity that these decisions will not amount to a disqualifying event requiring them to exercise their option or lose the tax advantage status.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions
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