As the most tax advantageous HMRC approved share option scheme available, the Enterprise Management Incentive (EMI) scheme has long been the preferred form of incentive for eligible early and mid-stage UK-based life science and healthcare companies. However, the current uncertainty around Brexit and the COVID-19 pandemic had recently cast doubt on whether the EMI scheme would continue to be available post 31 December 2020, and whether EMI option holders on furlough under the UK government’s Coronavirus Job Retention Scheme or with reduced working hours as a result of the pandemic, would lose EMI benefits as a result of failing to meet the EMI minimum working time criteria.
In summary, HMRC has recently confirmed that the EMI scheme will continue to be available post-Brexit and the government has introduced draft legislation to address some of the concerns around reduced working hours as a result of the pandemic.
We also set out below a brief reminder of the key EMI scheme eligibility criteria and financial thresholds and why EMI remains an attractive form of employee incentive from a tax perspective.
EMI scheme will continue to be available post-Brexit
In its recent Employment Related Securities Bulletin 37, HMRC confirmed that the EMI scheme will continue to be available after 31 December 2020, when the transition period under the EU withdrawal agreement ends. Historically, the EMI scheme had to be approved by the EU Commission under the state aid rules, but this is no longer a requirement under UK domestic law. This is a welcome commitment to the benefits offered by the EMI scheme and will be a boost to many in the life sciences sector looking to put tax efficient incentives in place or to continue to grant awards under existing EMI arrangements.
EMI participants who are furloughed or who are working reduced hours due to COVID-19 will still retain EMI benefits
To be eligible for EMI treatment, employees must meet certain statutory working time requirements. Concerns had been raised that employees on furlough or working reduced hours by reason of the COVID-19 pandemic would cease to meet the requirements and would therefore cease to be eligible for EMI. However, the UK government has now published draft legislation to come into force next year (but with retrospective effect) to introduce a time limited exception for participants in EMI schemes who are furloughed or who have had their working hours reduced below the current statutory working time requirement. This exception to the working time requirement will take effect from 19 March 2020 and is due to end April 2021, with the possibility of extension by HM Treasury. As a result, EMI scheme participants should not lose tax advantages due to furlough, unpaid leave, sick leave or reduced hours due to the COVID-19 pandemic and participants should not be forced to exercise their EMI options earlier than planned.
Reminder of EMI eligibility criteria and financial thresholds
The company granting the EMI options:
To qualify to grant EMI options, a company must be an independent trading company with gross assets of no more than £30 million and fewer than the equivalent of 250 full-time employees.
EMI options can be satisfied by newly issued shares or by the transfer of existing shares from a shareholder. The shares must be non-redeemable, fully paid up ordinary shares. A company cannot grant EMI options over more than £3 million worth of shares at any one time.
The employee receiving the EMI option:
To be eligible to be granted an EMI option, an employee must (subject to the COVID-19 relief measure explained above) work for the company at least 25 hours per week, or if less, 75% of their working time.
Employees (or their associates) who have a material interest (very broadly meaning holdings of more than 30% of the company’s share capital) in the company whose shares are being used for the scheme, or in certain related companies, cannot be granted EMI options.
Why do awards under the EMI scheme remain an attractive form of employee incentive for early stage life sciences companies?
From the company perspective, EMI schemes enable qualifying companies to grant share options to qualifying employees worth up to £250,000 per employee, without incurring income tax or National Insurance Contributions (NICs) charges at grant (or, in many cases, on exercise). In addition, a corporation tax deduction may be available when EMI options are exercised, with relief given in the accounting year in which the options are exercised.
For the relevant employees, there is no income tax liability on exercise, unless the exercise prices was less than the market value of the shares at grant (in which case income tax and NICs is due on the difference between the exercise price and the market value at grant). On disposal of the option shares capital gains tax may be payable on any gain over the market value of the options at the date of grant, with gains on the sale of EMI option shares benefiting from business asset disposal relief (formerly entrepreneurs’ relief).
