The COVID-19 pandemic has impacted the operation of the various tax-favoured employee share plans in the UK. HMRC has previously published a bulletin to address some of these issues (see our previous Law Now which summarises these here). However, that bulletin left a number of queries in relation to Enterprise Management Incentive (EMI) options unanswered (in particular in relation to the implications of COVID-19 in the context of the “working time requirement”) under the EMI legislation. On 26 June 2020, a new clause for the Finance Bill was published in relation to the “working time requirement” in the context of COVID-19.
Finance Bill and the EMI Working Time Requirement
By way of background, the “working time requirement” in the EMI legislation broadly provides that an employee can only be granted an EMI option and benefit from the associated tax advantages if they work for the relevant company for an average of at least 25 hours per week or, if less, 75% of their overall “working time”. If the employee does not meet this requirement throughout the time they hold the EMI option, the option will be subject to a “disqualifying event” and will therefore lose the beneficial EMI tax treatment if not exercised within 90 days of such disqualifying event. It was therefore likely that there were a number of employees who hold EMI options and who would have ceased to meet this requirement as a result of being furloughed (or otherwise reducing their working hours) due to COVID-19.
The new clause in the Finance Bill 2020 inserts a new provision into the EMI legislation which, in effect provides that there will be no “disqualifying event” resulting from an EMI option holder not being required to work for reasons connected with coronavirus disease (as defined in section 1(1) of the Coronavirus Act 2020). The explanatory notes state that this includes circumstances where the individual has had to take leave, is furloughed or reduces their working hours because of COVID-19. This clause will have effect from 19 March 2020 to 5 April 2021 (although there is provision for this relaxation to be extended to 5 April 2022, if required).
This is a welcome development and appears to be quite wide in its application. Given it is stated to apply from 19 March 2020, we would assume that even where an employee was furloughed (or otherwise ceased to meet the “working time requirement” due to COVID-19) more than 90 days ago (and therefore their options would otherwise have been subject to a “disqualifying event”), their option will not be treated as having been subject to a “disqualifying event” such that it retains the tax advantages of EMI. Furthermore, it is helpful that the clause provides for an extension to the 2021/22 tax year, if required (for example, if there is a “second wave” of COVID-19 which requires similar measures in the coming months).