EMI options were granted to someone on payroll full-time, but the company now do not have enough work to keep her occupied. Therefore, the company is hoping to end her employment and instead she will work for the company a few hours a week as a self-employed contractor with the idea that she works for other companies for the rest of the week
The company would like her to still be earning her options if she is meeting the targets set out in the EMI option scheme docs. However what happens to the tax position on the options if she is no longer an employee?
Related resources
Replies (7)
Please login or register to join the discussion.
Presumably it might depend on her employment contact too. Would she not have to rescind the options as she leaves employment? That would be common if the options vest over a few years.
However what happens to the tax position on the options if she is no longer an employee?
No experience whatsoever of EMI but you'd be as well to check that you don't end up compromising the wider arrangements.
Presumably (but you'd need to check) a company can grant - or have in place - options to a third party. I doubt there is any specific tax treatment for that so you would have to go back to first principles.
As suggested, presumably the options granted to the employee lapse when the employment ceases. You could possibly replace them with identical options but it might be easier just to offer a contingent payment based on the share price as the incentive. That way, the tax position for company and self-employed recipient should be clear.
Leaving employment is a disqualifying event for EMI, so she could have 90 days thereafter to exercise, or they lapse. The procedure should be set out in the plan rules or option documents, and check the articles as well for how to deal with any shares she is issued.
Talk to a lawyer if they want to grant replacement options to a non-employee. The tax reliefs will not apply, but in addition the Companies Act and securities law exemptions for employee share plans will not apply, so they could commit an offence if they're not careful. A phantom share plan - a bonus invoice that may be issued once specified targets have been met - might be a better solution, but I'd guess they just want to give her paper rather than real money.
Agreed, in theory. ITEPA s532 sets out modified tax treatment for exercises more than 90 days after leaving, but I never saw it in practice because all the EMI rules/agreements drafted for my clients included lapse-on-leaving clauses, such as, eg, "If an Optionholder ceases to be an Executive for whatever reason any Options which have not been exercised at the date of cessation shall lapse and cease to be exercisable."
It is always much tidier that way, and there would also always be a clause excluding the possibility of a claim on termination, for damages for the loss of any potential gain inherent in any unexercised options.
In a not dissimilar situation, I set up the EMI scheme such that the EMI option could be exercised early to allow the option holder to acquire restricted shares, where the restrictions on the shares mirrored the EMI performance conditions. Conceptually it was not particularly difficult, but it did need quite careful drafting to capture what was needed. And it was a requirement that a s432 election would be signed at exercise. If the individual is important to the business, you could look at this, but I would not otherwise. Yes, you could grant a relacement unapproved option, but without any tax breaks.