The impact of Covid-19 on EMI share options
Enterprise Management Incentive (EMI) schemes enable qualifying companies to grant tax-advantaged share options to eligible employees. However, the EMI legislation contains provisions that may prevent granting new options and/or negatively impact the tax treatment of option holders who: (i) are furloughed under the Coronavirus Job Retention Scheme; or (ii) have reduced working hours, or go on unpaid leave, as a result of the economic and social impact of the pandemic.
The issue stems from the individual employee failing to meet the minimum “working time” requirement in the legislation, being a requirement that the employee spends at least 25 hours each week (or, if less, 75% of their total working time) working for the company.
Specific EMI Covid-19 measures
The Finance Act 2020 (and draft legislation intended to be introduced in the next Finance Bill) provide relief to option holders and companies in this situation. The legislation makes temporary amendments to the “working time” requirement that:
- exclude a disqualifying event being triggered where the reduction in working time is for reasons connected to the coronavirus pandemic; and
- permit qualifying companies to grant new EMI share options to employees who are unable to meet the working time requirement because of reasons connected to the coronavirus pandemic, instead the time that the individual would otherwise have spent on the business of the company will work towards their “working time”.
This means that EMI options may still be granted to affected employees, and options held by such employees should not be impacted by changes to their working time.
The temporary amendments apply during the period from 19 March 2020 to 5 April 2021, and contain a simplified mechanism for the Government to extend the measures beyond this initial period by regulation, for up to a further year (i.e. to 5 April 2022) without requiring additional approval from Parliament. Given the prolonged coronavirus outbreak and Government extensions to the CJRS and other Coronavirus measures, it currently appears likely that the Government will use this power to extend the application of the EMI Covid measures beyond April 2021, but this position should be reviewed at the relevant time.
EMI filings and notification of EMI options
For an EMI option to benefit from EMI tax treatment, the grant of the option must be notified to HMRC within 92 days.
As part of the notification process, the company must provide certain confirmations to HMRC. Whilst not all the EMI Covid measures have fully come into legal force (an additional clause is intended to be included in the Finance Bill 2021), companies can be reassured that HMRC has provided confirmation that it has exercised “managerial discretion” to ensure the protection of these measures is available, meaning there should be no impediment to giving these confirmations before the new clause receives Royal Assent.
Companies granting new EMI options to employees with affected working hours should therefore still be able to comply with the requirement to notify the new EMI option grants to HMRC.
Furloughed employees and the EMI number of employees requirement
Qualifying companies for EMI purposes must have less than 250 full-time equivalent employees.
Companies should be aware that employees placed on furlough, working reduced hours, or put on unpaid leave for reasons related to the coronavirus pandemic still count when determining the number of ‘full-time equivalent’ (FTE) employees. The affected employees are treated as if they were working their usual hours prior to the pandemic – for example a part-time employee previously working 0.75 FTE, but now working reduced hours, should still be treated as a 0.75 FTE for such purposes.
State Aid: EMI post-Brexit
The operation of EMI share option schemes in the UK requires that the Government obtains state aid approval from the EU, which was most recently renewed in May 2018 and applied to 6 April 2023. However, following the expiration of the Brexit transition period on 31 December 2020 and the terms of the new trade and cooperation agreement with the EU, this EU approval is no longer required.
HMRC has confirmed that EMI schemes will continue to be available under UK law. It is not clear, however, how any new domestic state-aid regime will impact on EMI in the future, or indeed whether the Government will take the opportunity to expand the scope of the EMI and other tax-advantaged share incentive arrangements.
Overall, these measures provide welcome comfort to employers operating EMI schemes that have been affected by the pandemic, providing valuable flexibility where changes have been necessary to employees’ working patterns, and confirmation that these schemes will continue to be available in the future.