Why go for a HMRC approved options ("CSOPs")

A CSOP, or a company share option plan, offers employees and directors benefits that do not arise unless the employer sets up a CSOP and registers it with HMRC. Qualifying CSOP options provide shares to employees free of tax which is a good incentive. CSOPs are the choice if the business is too large for EMI options.  Many foreign parents expanding into the UK adopt CSOPs.

The government is promoting the use of CSOPs. They have increased limit on the value of options that can be awarded under as CSOP options to £60,000 per employee. And, there has been an easing of the restrictions on the type of share class that can be used.  This will be particularly beneficial to companies that do not or no longer qualify for EMI.

CSOP permits participation at the employer’s discretion

Employers can choose the employee pool and offer different terms to different employees and directors. This makes CSOP flexible.

• The SAYE and SIP share plans are not discretionary meaning all employees participate. Employers can be selective under CSOP.
• EMI options are discretionary but larger businesses and groups will not qualify.
• The gift of shares is discretionary but there are issues which frequently arise over matters such as authority to gift, dilution, what to do with good and bad leavers and fluctuating share values.
• Non-tax-advantaged options (i.e. options not awarded under the HMRC plans for CSOP, EMI or SAYE) are discretionary but not tax efficient.

Employees have no obligation to exercise the CSOP and can walk away if there is no financial gain for them.

There is no upfront cost to the employee until exercise.

Taxable value of the shares under CSOP option

The shares will qualify for the CSOP tax advantages if they are exercised at the actual tax market value of the shares at the date of grant. There are no overall limits on the taxable value of shares which can be put under CSOP option provided no employee receives more than £60,000 worth of shares. The shares do not have to be revalued following award so if the company does well the value of the award in real terms goes up.

For unquoted companies

The taxable value for the purposes of the £60,000 limit is measured on a fiscal basis only at the date of grant.  Generally, fiscal valuations are lower than commercial values. In practice, sizeable discounts can be negotiated to the commercial value and agreed with HMRC. We undertake this process for employers.

For quoted companies

The taxable value is taken from the traded price on the relevant stock exchange.

Dilution

There are no statutory limits on how many shares can be put under the CSOP option. However, shareholders will have to consent to the size of the employee share pool as exercised options will dilute their shareholding. We can protect shareholders from future dilution and prepare share capital tables showing changes in share ownership.

Trading status

The company can be quoted or unquoted. It cannot be an unquoted subsidiary of a quoted parent company. There is no requirement that the company trades in the UK and no trade is excluded from qualifying from the scheme.

CSOP and a foreign parent company

Foreign parent companies can implement CSOP for UK based employees if the shares under option will be the parent company shares.

Conditions the employees must meet for CSOP tax relief

A ‘qualifying employee’ can receive CSOP options when:

• The employee and his associates do not have a material interest in the company.
• Employees will qualify. Directors need to work full time (at least 25 hours a week) to qualify.
• The employee can participate in an EMI scheme and a CSOP in the same company at the same time provided the EMI limits are not exceeded.
• The shares under option are non-redeemable, fully paid up and ordinary.
• The options are exercised with 10 years from the date of grant.
• The employee does not leave the company and does not exercise the option before the third anniversary of the grant date.

Taxation benefits for CSOP options

CSOP options are tax efficient for employees and employers.

For employers

The set up and administration costs reduce the taxable profits for corporation purposes. Usually, the biggest benefit for employers in terms of tax is that there is tax relief on exercise for the employer.  The employer’s claim to corporation tax is equal to the income tax that would have been payable by the employee if the CSOP option had not qualified for tax relief.

For employees

There is no income tax or national insurance payable upon exercise of a qualifying CSOP option.  One of the qualifying conditions is that the CSOP option has been held for at least three years.  There are exceptions for good leavers – death, disability, redundancy.

Taxation of CSOP options on disposal

When the CSOP option is sold following exercise all profits received by the employee are subject to capital gains tax. The rates of tax for capital gains are considerably lower than the rates of income tax and National Insurance in the UK.

With non-tax-advantaged options (i.e. not CSOP, EMI or SAYE options) it is only the gain arising after exercise which can be brought within the capital gains tax regime. The gain arising up to the point of exercise will have been assessed to income tax and usually national insurance.

CSOPs do convert what would otherwise be taxed at the higher rates of income tax and national insurance into the lower rates of capital gains tax.

Avoid problems

Design and implementation requires planning which we undertake for you. A poorly designed and implemented CSOP scheme will cause problems to your company, such as:

• Resentful and demotivated staff who will have a surprise tax bill to face and will feel deceived by the company’s conduct;
• Cross shareholders who have been diluted above what they agreed for and lost a share of dividend and capital entitlement;
• Shareholders who exercised CSOP options and block company decision making and refuse to be dragged into the sale of the company.

Requirements for the CSOP option agreement

Every CSOP option grant must follow statutory criteria. There will be a written contract between the company and the employee to cover the CSOP grant which will contain:

• The date of grant
• Number of shares under options and the source of shares on exercise
• The exercise price
• How and when the option can be exercised
• Whether the exercise price is the actual market value of the shares at grant
• Restrictions on the shares
• Optional performance conditions

Benefits of good employee communication about the CSOP option

We explain the mechanics of CSOP to the employees and explain the tax position so they can manage their personal tax affairs. The CSOP scheme should be communicated to employees in terms they will understand. If employees do not know how much value they are getting the CSOP options will not achieve their objective.

Implementing CSOP scheme and non-tax-advantaged share options

There are many reasons why a company may want to adopt a CSOP scheme and an non-tax-advantaged option scheme. For example, the company has consultants or part-time directors who do not qualify under CSOP but who the company wants to incentivise.

We draft share plans which include CSOP options and non-tax-advantaged share options.

Popularity of CSOP options for foreign companies

International companies looking to extend their operations into the UK implement CSOPs for their UK employees as a part of an international share plan. The terms of the plan usually mirror those of their foreign counterparts but we adapt the foreign plans to suit UK tax law. We draft sub plans for CSOPs implemented by overseas parent companies.