Late on Friday, 26 June 2020, with little fanfare, the Chancellor of the Exchequer tabled a new clause for inclusion in the Finance Bill 2020 (FB 2020) during its Report stage in the House of Commons. It addresses a key concern around furloughed employees who hold enterprise management incentive (EMI) options (as discussed previously on this blog), and confirms that EMI optionholders will not lose the beneficial tax status of their options as a result of being furloughed or working reduced hours because of coronavirus (COVID-19).
The new clause is very welcome as many EMI optionholders and their employers have been waiting anxiously for the government to confirm its position in this area. EMI options are widely used – according to HMRC figures, outlined in the Tax Information and Impact Note (TIIN) accompanying the new clause, in 2018-19 alone, more than 34,000 individuals were granted EMI options and approximately 12,000 companies were operating EMI schemes. However, there is a potential sting in the tail lingering as the impact of the concession on the state aid approval for the EMI scheme is not yet clear – unfortunately it is not quite time to breathe a total sigh of relief as a result.
The CJRS and furlough
The government’s economic response to the COVID-19 pandemic has focused on helping businesses ‘bridge’ the crisis by protecting cash flow and liquidity. That is the policy logic that sits at the heart of the Coronavirus Job Retention Scheme (CJRS). Very broadly, the CJRS allows businesses that would otherwise be unable to maintain their workforce (because of the effect of COVID-19) to ‘furlough’ their employees, and apply to the government for a grant to cover 80% of monthly wage costs (up to £2,500). As of 28 June 2020, the government was paying the wages of more than 9.3m furloughed employees at a total cost of more than £25.5bn.
EMI working time test
While the CJRS is clearly designed to protect jobs, it has had unexpected and unintended implications. Paradoxically, one of the most concerning side-effects is on employee share schemes, and EMI in particular, also designed to incentivise and retain employees in a business. Under EMI schemes, provided the individual optionholder ultimately buys the relevant shares for an amount equal to at least the market value they had when the option was granted, no income tax or National Insurance contributions liability should arise.
However, one of the core qualifying conditions for EMI is that optionholders are required to meet an ongoing ‘working time requirement’. In effect, this requires an employee to commit at least 25 hours per week (or if less, 75% of their total working time) to the employer company. Failure to satisfy the working time requirement is a ‘disqualifying event’ for EMI purposes meaning that the full tax benefits attaching to options can be lost.
The problem is obvious: CJRS furlough requires that an employee must not undertake any work for or on behalf of their employer, meaning that, without intervention, furlough will be a EMI disqualifying event.
A new concession
The EMI rules already contain some concessions where an employee would have been able to satisfy the working time requirement but for certain specified circumstances, including, for example, injury, ill health, disability, pregnancy or parental leave. Under the new clause, HMRC will accept that, with effect from 19 March 2020 and until 5 April 2021, “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”.
Subject to any issues that arise in connection with the concession in the context of EU State Aid, this welcome change should protect the valuable tax reliefs afforded under EMI for furloughed employees and those working reduced hours, meaning participants do not need to exercise options earlier than planned. Employers should check their EMI scheme rules to ensure that the change is effective for options they have granted and also to ensure that the lapse provisions attaching to options have not inadvertently been triggered (unfortunately in the latter case, the new concession will be unlikely to help depending on how the rules are drafted). They will no doubt also want to pass on the good news to optionholders.