At the time of the grant of an EMI option, the employee to whom the option is granted must sign a written declaration confirming that they spend at least 25 hours each week or, if less, 75% of their working time, working as employees for the company or a qualifying subsidiary. Employees have to make new working time declarations for each new grant of EMI options. Under the relevant legislation, the failure to give this working time declaration (WTD) disqualifies the EMI status of an option.
Historically, prior to 6 April 2014, the WTD was included in the notification process required following the grant of an option by way of a paper form. When online filing was introduced, the WTD was removed from the online filing process. Instead, the employee needs to sign a separate WTD, either as a stand-alone document or as a provision in their option agreement. This WTD does not need to be filed with HMRC but HMRC can ask companies to provide a copy of an optionholder's WTD and this might be provided within 7 days.
We have advised a number of companies who, as a result of not being aware of this change, failed to comply with the WTD requirement for EMI options granted from 6 April onwards. Rather, they continued to use their existing EMI option agreements which did not include the WTD. Traditionally HMRC took a strict view where there was non-compliance of the legislative provisions but as this particular point has become more of a widespread issue, HMRC seem to be taking a more sympathetic approach, particularly because non-compliance will not have been the fault of the optionholder but an administrative error by the company.
It is hoped that HMRC will issue guidance on the point in due course, but in the meantime, we have written to HMRC for a number of clients to request clearance that their EMI options would not be disqualified as a result of the WTD not being obtained in these circumstances. To date, HMRC have been amenable to this on the basis that it is possible for the company to demonstrate that the relevant employees have in fact met the working time requirements at the time of grant and at all times since. Whilst some companies may prefer to wait for official HMRC guidance to be released rather than making an application to them now, it would nevertheless be advisable to obtain WTDs in the meantime confirming both current and prior status of the optionholder. The company's standard form EMI option agreements should also be updated to include the WTD.
EMI Options – an update as a consequence of furloughing
What is the issue?
As stated above, for EMI options, eligible employees must meet the working time commitment. This is that the employee must work for the company for least 25 hours a week or 75% of their total working time (should they have more than one job).
If furloughed the employee will not have any committed working time and in some senses will be like being on garden leave or parental leave but not actually within those categories.
That could mean anyone furloughed will have a disqualifying event with regards to their EMI options, which might cause them to lapse or at least they will lose tax advantages at 90 days.
What are we doing?
Together with other advisors, we are approaching HMRC to obtain clarification on the issue. We would hope that HMRC will take a common sense approach and provide a concession in these circumstances so that there will be no disqualifying event for outstanding share options.
Although there is no settled position on this yet, should any clients have any concerns, we would obviously be very happy to discuss this matter with them.
If you would like to discuss any of these issues further or for any additional guidance, please contact Stephen Diosi.