Finance Act preserves tax status of furloughed employees holding EMI options
One requirement for a holder of share options to enjoy the beneficial tax treatment under EMI tax status (gains are charged to capital gains tax, not income tax) is that the optionholder must be a full time employee. Earlier this year there was concern that furloughed employees might forfeit this tax status. This has now been remedied in the Finance Act. Click here to read more.
Furloughed employees and EMI status
This measure (section 107 Finance Act 2020) ensures that individuals who are furloughed or who have their working hours reduced below the current statutory working time requirement for EMI as a result of coronavirus will retain the EMI tax advantages.
Those individuals participating or wishing to participate, in an EMI option schemeare required to meet the ‘working time requirement’. This means that the employee’s time committed to the company must be equal to or exceed the statutory threshold of 25 hours per week or if less, 75% of their working time.
Where employees are furloughed, working reduced hours or taking unpaid leave, they may not be able to meet the committed working time requirement, which may prevent participants from being granted new options. The Finance Act 2020 introduces a time-limited exception to the disqualifying event rules so that existing participants of EMI schemes are not forced to exercise their options much earlier than planned. This measure extends the time-limited exception to new EMI share options granted after 19 March 2020.
HM Revenue and Customs will accept that, from 19 March 2020, if an employee holding EMI share options has met or would meet the requirements at the time of grant but ceases to for reasons connected to coronavirus, the time which they would have spent on the business of the company will count towards their working time. The measure currently lasts until 5 April 2021.
EMI: agreeing share valuations
HMRC are currently allowing valuations agreed for the purposes of EMI option grants to last for 120 days (an increase on the previous 90 days). This is a temporary measure but no specific end date has been stated. As always, if any events occur between a valuation being agreed and the end of the 120 days (and before options are granted) which may affect a valuation (for example an offer to buy the company or invest in it), HMRC should be notified and the previously agreed valuation will cease to apply unless they confirm otherwise.
If you would like to explore how an employee share scheme could work for your company, please call me on 020 3818 9420