The Finance Act 2020 has recently made temporary changes to the complex rules pertaining to EMI share option schemes that protects furloughed employees against what would otherwise be the loss of their eligibility to be within the scheme’s remit.
To be eligible for EMI share options, an employee must work for a certain amount of time on the business of the relevant company or group of companies. It must either be (a) more than 25 hours per week or, (b) if less than that, 75% of their working time. This is known as the “working time requirement”.
Employees are expected to meet this working time continuously, save for the following limited exceptions:
- Injury, ill-health or disability;
- Pregnancy, childbirth, maternity, paternity, shared parental, parental bereavement or parental leave;
- Reasonable holiday entitlement; or
- Not being required to work during a period of notice of termination of employment (each being a “deemed working time event”).
The relevance of this working time requirement will be apparent when considering “furlough leave”, pursuant to the Coronavirus Job Retention Scheme (“CJRS”). The CJRS operates so that an employee who is furloughed agrees with their employer to vary their contract of employment so that they are not obliged to work but will still be paid at least some of their salary.
If an employee who has EMI share options is furloughed, the issue is clear: they would no longer be an eligible employee under the scheme, which means that a “disqualifying event” occurs. This is, firstly, because the effect of being furloughed is that the working time requirement is not satisfied and, secondly, an employee being on furlough leave was not a deemed working time event.
The consequence of losing eligibility under the scheme is that the employee would have to exercise the EMI share option within 90 days of the disqualifying event in order to benefit from the tax advantages of the EMI Option, which in many cases is either not permissible under the individual scheme rules or would otherwise require the employing company to waive certain exercise conditions for them.
To avoid this unsatisfactory situation, the Finance Act 2020 adds a new deemed working time event: not being required to work for reasons connected with coronavirus. This clearly covers furlough leave under the CJRS, which means that an employee who has EMI share options does not lose their eligibility (so a disqualifying event does not occur) because they are on furlough leave.
This addition under the Finance Act 2020 has effect retrospectively, beginning on 19 March 2020. It will end on 5 April 2021. This end date can be extended for a further year by regulations made by the Treasury.