Furlough leave not to be a disqualifying event for EMI Options
2nd July 2020
Enterprise Management Incentive options (“EMI Options”) are option schemes used to help recruit, retain and incentivise employees. They hold various tax advantages for both the issuing company and the recipient of the option.
In order to qualify for an EMI Option, one of the requirements is for the option holder to work at least 25 hours per week or 75% of their working time (if that is less) for the company issuing the option. They are required to continue this for the duration of the option for the tax advantages to remain valid. If they stop satisfying this requirement, it amounts to a disqualifying event and they have only 90 days to exercise the option or else they lose the tax advantages.
As many employees have been furloughed or have taken unpaid leave or reduced hours as a result of COVID-19, there has been some concern over the impact this would have on their EMI Options. Many would have suffered a disqualifying event or failed to qualify for a new EMI Option.
However, an amendment to the Finance Bill 2020 to amend section 535 and Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 was tabled on 26 June 2020 which amends provisions relating to commitment of working times and disqualifying events for EMI Options. It provides that a disqualifying event does not occur as a result of the option holder taking leave, being furloughed or working reduced hours “for reasons connected with coronavirus disease”. This also applies when calculating the person’s committed time before granting an EMI Option. The furlough leave is effectively treated in the same way as a period of maternity leave would be.
These modifications have been backdated to 19 March 2020 and will apply until 5 April 2021. They can also be extended for a further 12 months.
This will come as a relief to many companies and option holders, some of whom will have made decisions relating to furlough with the EMI Option provisions in mind.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at July 2020. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.