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Coronavirus - Tax-advantaged employee incentive arrangements - UK

  • United Kingdom
  • Coronavirus - Country overview
  • Coronavirus - Tax issues
  • Employee benefits
  • Tax planning and consultancy

10-06-2020

HM Revenue & Customs released guidance on 9 June 2020 on the impact of Covid-19 (and in particular furloughing employees) on the four HMRC “tax-advantaged” employee share incentive arrangements (i.e. EMI, CSOP, SAYE and SIP).  Guidance has also been issued on the timing of the filing of annual share incentive related returns.  All official guidance is helpful, but unfortunately this does not yet cover EMI plans, where some of the most material concerns have been raised.

Enterprise Management Incentive (EMI) Options

EMI options are amongst the most tax efficient ways to reward employees and are commonly used by smaller companies in the UK.  Employees on furlough are still employees, but the EMI rules do not work well with the concept of an employee who does not work.

One of the requirements for EMI options is that an employee option holder must satisfy a “working time requirement”.  The average amount per week of time that they are required to spend working for the business must be (i) 25 hours per week, or (ii) if less, 75% of their total working time.  There are limited exceptions for this that cover, for example, holiday and parental leave.  In principle, an employee who is furloughed cannot meet this working time requirement.

If a furloughed employee does not meet the working time requirement they cannot be granted a new EMI option (which a company might want to do to keep them incentivised through this difficult time).  More importantly and concerning, any EMI options that they hold will become disqualified unless HMRC relaxes the rules.  Depending on the terms of the EMI plan, a disqualifying event might mean that the EMI options lapse.  Even if they do not lapse, income tax and possibly employee’s and employer’s National Insurance contributions would become payable on the exercise of their option, and this may lead to complications on eventual exercise.

As a side note, the same issue arises where an employee moves to a zero hours contract.  HMRC has recently confirmed to us that an employee moving to a zero hours contract is also a disqualifying event for EMI purposes. 

This seems to therefore be a situation where the tax legislation has not kept pace with changes in employment practices or special measures taken to protect jobs, and it is hoped that the opportunity may be taken to update the legislation or HMRC practices to cover both situations.

Separately, HMRC have revised their usual practice when agreeing valuations for EMI purposes.  In the current circumstances, HMRC will accept that a valuation agreement for EMI options can remain valid for a 120 day valuation period rather than 90 days (although this remains subject to there being no material changes in the Company’s circumstances that may affect value).

Company Share Option Plan (CSOP)

Employees on furlough are still entitled to participate in grants of CSOP options.  CSOP options may be particularly advantageous at the moment if the value of the shares is relatively low, but may increase substantially over the next three years.

There is no ongoing working time requirement for employees (although directors must work at least 25 hours per week excluding meal breaks to be eligible to be granted CSOP options).  Therefore, existing CSOP options are not affected by furlough.  HMRC guidance confirms that as long as the optionholders were full time directors or qualifying employees at the date of grant, their options will not be disqualified by a furlough arrangement.

Save As You Earn (SAYE or Sharesave) plans

Employees on furlough must be included in any SAYE invitations.

Employees participate in SAYE plans by deductions being made from net pay.  HMRC’s guidance has helpfully confirmed that furlough payments under the Coronavirus Job Retention Scheme can constitute a salary, so SAYE savings can continue to be deducted from CJRS payments.

However, employees who are on furlough or are on reduced pay or hours may find that they can no longer afford to make payments into their savings contract.  Employees cannot change the amount of their monthly contributions, but they have a couple of choices:

  • They can cancel their savings contract.  They will get back all the savings made so far but will lose their rights under that SAYE invitation.  That may not be a problem if the share price has now dropped below the exercise price.  Although this doesn’t impact the employees, companies should note that there can be adverse accounting consequences if employees cancel savings contracts.
  • They can take a savings holiday and stop making payments for up to 12 months without causing their participation in the plan to lapse (a relatively recent extension from 6 months).  HMRC’s guidance has now extended this payment holiday period further, so that contributions can be postponed for a longer period where the additional months are missed due to Covid-19.  The employee cannot make up the missed contributions, but the maturity date of the SAYE option is extended by the number of months for which contributions are missed.  The important point here is that the option is not required to lapse under the HMRC rules – but Plan rules should be checked to ensure that they do not need to be amended to prevent the options lapsing under their terms.

If SAYE participants are unable to make monthly contributions from their salary, because they are having to take unpaid leave during the coronavirus pandemic, HMRC will permit payments to be made via standing order.  This is in line with the existing approach for parental leave, sick leave, secondments and sabbaticals.  However, deductions from salary should recommence at the earliest opportunity.

Share Incentive Plans (SIPs)

Employees on furlough need to be included in any invitations to participate in SIPs.

SIP contributions have to be deducted from salary.  HMRC’s guidance has helpfully confirmed that furlough payments under the Coronavirus Job Retention Scheme can constitute a salary so SIP contributions can continue to be deducted from CJRS payments.

However, the annual limit for partnership shares is £1,800 worth of shares per year or, if lower, 10% of salary; so if salaries are reduced, participation levels have to be reduced.

Employees who are making monthly contributions into a SIP have the following choices:

  • they can cease making monthly contributions at any time, and then restart them later (but cannot make up missed contributions); or
  • they can amend the amount they contribute; or
  • they can withdraw from the SIP (i.e. cease to participate).

HMRC guidance has confirmed that there will be no relaxation of the rules here - participants will not be allowed to make up missed deductions if they stop or reduce contributions due to Covid-19.

Annual Filings

Annual filings with HMRC for the tax year ending 5 April 2020 registering new share plans and reporting transactions involving shares and employees/directors whether under a share incentive plan or otherwise, need to be filed by 6 July 2020.  HMRC has confirmed that it will accept that if there are difficulties in making the filing on time as a consequence of Covid-19, this will count as a reasonable excuse.  This means that an automatic fine for late filing and additional fines for continued failure to file should not apply. 

It is clear though that every attempt should be made to file on time and HMRC may well require some evidence of there being a difficulty to file. 

For further information and more guidance, contact a member of our Employee Incentives team.