The introduction of the furlough scheme brought uncertainty for employers who had granted employee management incentive (EMI) options to their employees. An EMI option is a type of employee share scheme that enjoys favourable tax treatment. These schemes are often used as employee rewards, and are a method of retaining and incentivising key employees. However, there are strict requirements that must be met for an EMI option to receive the favourable tax treatment.

In particular, an employee must work for the company for at least 25 hours per week, or 75% of their working time (if they work less than 25 hours a week). There has been considerable worry that if an employee is not actively working for a Company whilst furloughed, they would cease to satisfy these working time requirements. This would be a disqualifying event for the purposes of EMI legislation, meaning the employee would no longer be able to participate in the EMI option scheme.

What happens next depends on the drafting of the individual EMI scheme, but it may mean that the options have to be exercised within 90 days of the disqualifying event to retain the tax benefit, meaning the employee has to find cash to buy the shares now, and also removes the incentivisation and retention benefits of the scheme for the employer going forward.

Alternatively, if the scheme rules do not allow this early exercise, then the scheme would become non-compliant and the employee would lose the beneficial tax treatment altogether. This means that, when the option is exercised, the gain that arises after the disqualifying event will be subject to income tax and national insurance contributions. This results in additional administration for the employer. Additionally, entrepreneurs’ relief (which can reduce the capital gains tax payable from 20% to 10%) and is usually granted on the sale of shares purchased pursuant to an EMI scheme, may not apply.

Finally, a large number of EMI schemes are drafted so that a disqualifying event such as this, would cause the scheme to lapse altogether.

The uncertainly around the status of furloughed employees has caused some anxiety, but the Government has now tabled an amendment to the Finance Bill 2020 which, if enacted, will introduce a time limited exception for the working time requirement in EMI schemes. This potential exception provides clarity for employers and employees, as under this exception any time that the employee is not required to work for reasons connected with COVID-19 is to be counted as working time.

Additionally, the amendments allow time spent on furlough to be counted as working time for EMI options issued in the future. This exception will allow companies to continue to use EMI schemes to incentivise their employees, even where those employees were furloughed during the COVID-19 pandemic.

Although, this position is not guaranteed until the bill is passed, the proposed amendment provides some certainty that employees with EMI options will not lose out due to being furloughed, and shows how the government intends to treat furloughed employees with EMI schemes.

We will keep you updated as to the position, but If you need any assistance with any existing EMI schemes or wish to discuss putting in place new EMI scheme, then please contact Teri Hunter or any member of the Moorcrofts corporate team.