Some employers will need to take steps now to protect the tax advantaged status of their employees’ EMI options
Temporary relaxations have been made to the EMI legislation in response to the COVID-19 outbreak. These are welcome, but employers might need to take action to ensure they and their employees continue to benefit from EMI tax advantages.
EMI share options offer the most flexible and generous UK tax advantages of any employee share plan.
In order to be granted a new qualifying EMI option and retain all the tax advantages associated with EMI options they already hold, amongst other conditions, the employee must devote at least 25 hours per week or, if less, 75 percent of their total working time, to the business of the company.
Where an employee does not – or ceases to – meet this working time requirement, some or all of any gain that arises on exercise of their options may be subject to income tax and employee’s NIC at up to 47 percent (or 48 percent for Scottish taxpayers) plus employer’s NIC at 13.8 percent, rather than be taxed at lower CGT rates.
In principle, any reduction in an employee’s working time could therefore prevent them being granted new EMI options, and – unless it is possible to exercise existing options within 90 days of the working time breach – jeopardise the tax advantages of EMI options they already hold.
However, changes to the EMI legislation mean that from 19 March 2020 until 5 April 2021, an employee will not be prevented from meeting the working time requirement where, due to the COVID-19 outbreak, they are:
HMRC have confirmed that for these easements to apply, employers and employees must document the relevant circumstances and demonstrate that any reduction in working hours below the required minimum results from the COVID-19 outbreak, rather than from anything else.
For employees who have been furloughed under the Coronavirus Job Retention Scheme (CJRS), the furlough agreement between the employee and employer should provide this evidence.
However, for employees who have taken unpaid leave, or who have worked reduced hours without being furloughed under the CJRS, employers should ensure the link between those reduced working hours and the COVID-19 outbreak is appropriately documented, and copies of that evidence are retained by the employee and employer.
This is important to protect against any future challenge to the qualifying status of your employees’ EMI options from HMRC, or from a potential purchaser in the course of a due diligence exercise.
KPMG has extensive experience of advising companies on operating EMI plans, reviewing and correcting compliance positions, and undertaking due diligence exercises in preparation for exit.
We can support you to manage your EMI risk, and ensure your EMI plan delivers maximum value and remains a powerful tool to incentivise your key employees.
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