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07th July 2020

EMI Options: Working Time Requirements to Exclude Effects of Coronavirus

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At the end of June a suite of changes to the Finance Bill 2020 were introduced aimed at clarifying the tax effects of some of the Government's Coronavirus measures. Amongst these were the long-awaited proposals to protect the holders of Enterprise Management Incentive Options from the effects of the pandemic in certain circumstances.

Currently, the EMI Code under the Income Tax (Earnings & Pensions) Act 2003 ("ITEPA") dictates that an employee must meet certain "working time requirements" in order to continue to benefit from the tax advantages. The requirements are that the employee's committee working time is at least 25 hours per week or, if less, 75% of their working time.

The proposed changes to ITEPA under the Finance Bill will protect any option holders who temporarily fail to meet these requirements "for reasons connected to coronavirus". Any temporary break or reduction in work as a result coronavirus would therefore not be treated as a "disqualifying event" for tax purposes.

These proposed changes are intended to protect option holders who have taken unpaid leave, been furloughed or agreed to work reduced hours because of coronavirus.

This ringfencing is proposed to be time-limited with the initial end date on 5th April 2021. This would cover the effects of any second wave. In addition, the period can be extended by 12 months if the pandemic continues to persist into 2021.

The proposals will come as a significant relief to EMI Option Holders who, in the absence of this express exclusion, would otherwise have faced a choice between (a) exercising their options now (if they are exercisable) or (b) risking an unexpected (and seemingly unfair) income tax charge when the options come to be exercised.

It is worth noting that, as drafted, the changes would only protect the option holder if they continue to be an employee. If an option holder's employment is terminated for reasons connected with coronavirus this would still be a disqualifying event, even if they are later re-engaged.

For more information about existing and new EMI and other employee share schemes please get in touch with James Lawrence on 01223 532716 or click here to email James.