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EMI Options and the Furlough Scheme

09 July 2020 #Corporate #Commercial


The benefits of an EMI scheme amongst qualifying participants is widely known.  However, the furlough scheme brought in to ease the financial burden of the employee wage bill on businesses has left some debate as to whether or not an employee will still benefit from the attractive reliefs offered by the EMI Scheme.

EMI Options – What are they?

An EMI Option plan is a share option scheme offered by a qualifying company to qualifying employees.  The option scheme can contain conditions and rules around performance and length of service.

A valuation is agreed in advance of grant with HMRC, the option on completion is registered with HMRC within the requisite period and on exercise there are principally the following tax advantages:

  • No Income tax or charge to National Insurance is payable; and
  • The employee benefits from entrepreneurs relief on disposal of the shares.

The EMI scheme was introduced some 20 years ago to incentivise and motivate key employees to grow and develop smaller businesses who may have not been able to compete with wages and employment packages offered by larger businesses.  The government recognised that the SME sector is key to both economic success of the Country and healthy employment figures.

EMI Qualification Criteria

Of course, to prevent abuse there are specific rules to qualification for EMI status.  These include:

  • A full-time employee cannot be granted more than £250,000 in value of option shares.
  • A qualifying company cannot grant more than £3,000,000.00 in value of shares.
  • Option shares must be in a trading company where gross assets are no more than £30,000,000.00 with fewer than 250 employees.
  • A grantee must be an employee of that trading company or a subsidiary.
  • An employee must work at least 25 hours per week or spend 75% of their working time with the company; and
  • Not hold more than 30% of the shares in the company.

Furlough and EMI Options – the problem

Under the Government’s furlough scheme, an employee is not permitted to work for their employer whilst under furlough.  However, a furloughed employee is permitted under the scheme to work for another employer. 

As set out above, to qualify for the benefits under an EMI scheme there are set criteria in terms of working hours or percentage amount of how much time an employee must spend working to qualify for the relief.

As it stands, under the current furlough scheme, an employee could fall foul of the rules by virtue of the working hours criteria which would negatively impact the tax treatment of the option scheme.  HMRC is aware of the position, as at the time of writing its guidance states “HMRC is exploring issues raised by stakeholders in relation to coronavirus and Enterprise Management Inventive and we will provide updates as soon as possible.”

So what can be done?  The writer would expect the qualifying criteria to be relaxed for anyone affected during the lockdown and furlough period on the basis that the Government has taken interim action in respect of the difficulties caused by the pandemic, however, we await official direction.  Nevertheless, now would be a good time to consider the implementation of such a scheme for two principal reasons.  Firstly, in a market place facing restrictions on salaries and bonuses, but at the same time, requiring the most from key personnel an EMI option scheme is a great way to incentivise and tie those people to your business without impacting cash at bank.  Secondly, the impact of COVID-19 is likely to have adversely impacted the share value of many companies which means that employees could benefit from a greater return on exercise.

 

 

Clarkslegal, specialist Corporate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Corporate matter please contact Clarkslegal's corporate team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Stuart Mullins

Stuart Mullins
Partner

E: SMullins@clarkslegal.com
T: 0118 960 4672
M: 0777 630 5578

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