Company share option plans (CSOP) and enterprise management incentives (EMI) are two statutory share option regimes that can be used to incentivise employees in a tax-efficient way. Broadly, where the relevant qualifying criteria have been met, both the CSOP and EMI schemes allow employees to acquire shares in their employer (or its group) for less than the value of the shares at the time that the options are exercised without triggering a benefit in kind employment tax charge.

Since the creation of the EMI regime, many small businesses in the UK that meet the relevant qualifying conditions have granted EMI options as an effective and efficient employee incentivisation tool. Historically, the uptake of CSOP options has been far lower.

However, certain changes that will be made to the CSOP regime with effect from 6 April 2023 could mean that CSOP options increase in popularity, particularly for businesses in the financial sector that are prohibited from using EMI options.

In this blog we look at some of the upcoming changes that seek to make the CSOP regime more attractive, benefitting both companies currently operating CSOPs and companies that don’t yet have a CSOP scheme in place.

Position up until 6 April 2023

Businesses considering granting tax-advantaged share options typically consider whether they are eligible to grant EMI options in priority to CSOP options. EMI options are – and will remain post 6 April 2023 – the more flexible of the two for eligible businesses, including because EMI options can be granted at a discount to market value, can be exercised within 3 years of grant and retain their tax-advantaged status and can be granted to individuals over shares worth in aggregate £250,000 at the time of grant.

However, not all businesses are eligible to grant EMI options. EMI options can only be granted by companies (or groups) that at the time of grant have gross assets of no more than £30 million, no more than 250 full-time employees and that carry on a “qualifying trade”. Qualifying trade for these purposes excludes “banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities”, so groups carrying on these activities cannot grant EMI options.

The CSOP regime is not subject to these size or qualifying trade restrictions, so groups that are prevented from granting EMI options might have been expected to look to grant CSOP options as a first alternative.

However, CSOP options have to date been subject to two requirements which particularly limit their attractiveness:

• where the relevant company has more than one class of share a majority of the class of share over which the CSOP options are granted must be either “employee control” shares (that is, shares which enable employees and directors to control the company) or “open market” shares (that is, shares that are not owned by employees and directors) in the employer group; and
• CSOP options could only be granted over shares to employees with a market value of no more than £30,000 at the time of grant.

These requirements together have severely limited the use of the CSOP regime. So, while the relatively low individual share value cap of £30,000 would naturally push employers to look to grant options over shares with a lower value, for example, shares with value participation hurdles, the share class requirement may in many cases prevent them from doing so because such special shares would not be the single class of share of the company and would neither give employees control nor be majority held by external shareholders.

As a result, and in our experience, many employers have taken the view that the time and cost of establishing and operating a CSOP scheme is not proportionate to the limited value of shares that options can be granted over to each employee, and may instead just grant non-tax advantaged or “unapproved” share options which are taxed as a bonus but give great flexibility.

Position from 6 April 2023

From 6 April 2023, the “employee control” and “open market” share class requirements mentioned above will fall away, and the individual share value limit will increase from £30,000 to £60,000. This will mean companies can issue options over any ordinary, non-redeemable share class with no requirement that the shares are held by non-employees or grant employees control of the company.

Although the increased individual market value cap of £60,000 per employee is still relatively low, because the share class requirements have been dropped this may well not be a major impediment to granting CSOP options since the scheme company can issue shares with specific economic terms that reduce their value to a very low value at the time of grant of the option over them.

CSOP schemes might become particularly attractive for groups that carry on non-qualifying trades and so which cannot use the EMI scheme.

Comment

The changes to the CSOP regime are unlikely to displace EMI options as the preference for groups that are EMI eligible, since EMI options are generally more flexible than CSOP options.

However, we expect that groups that are disqualified from granting EMI options may look to CSOP options more actively going forward. The relaxed rules should enable more companies to offer CSOP shares and allow specific growth shares to be issued to an employee.

Companies intending to use either scheme should, of course, ensure that the value of the relevant shares by reference to which they are granting options does not exceed the relevant limits, and HMRC offer valuation services for both CSOP and EMI shares.

CSOP vs EMI scheme terms

The table below summarises the differences between EMI options and post-6 April 2023 CSOP options.

Please contact any member of our UK tax group if you have any questions about how the new CSOP regime may benefit your business.