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Company Share Option Plan (CSOP) changes – an attractive prospect for businesses

  • United Kingdom
  • Tax planning and consultancy
  • Tax planning and consultancy - Autumn Statement

18-11-2022

The UK Chancellor has confirmed that the Company Share Option Plan (CSOP) regime will be revamped by increasing the statutory limit on the value of shares which may be subject to CSOP options held by any individual and by removing the previous restrictions which prevented many companies that have more than one class of share from implementing a CSOP. This, together with the announced reduction of the income level at which the 45% income tax rate will apply, makes CSOP options even more attractive than they currently are.

In this briefing we comment on the proposed changes to the CSOP regime and what they mean for businesses.

Tax Advantages

CSOPs offer a highly tax efficient way for companies to permit employees to acquire shares in the company for which they work. Provided that the relevant statutory conditions are met:

  • the employer’s costs of establishing the CSOP are deductible for corporation tax purposes
  • no income tax liability or employee’s national insurance contributions will arise on the option holder either on the grant of the option or in respect of any gain made upon its exercise
  • no employer’s national insurance contributions will arise for the option holder’s employer either on the grant of the option or on any gain made upon its exercise
  • the option holder’s employing company may be eligible to claim a corporation tax deduction in respect of the gain made on the exercise of the option

Impediments on the use of CSOP

Under the current legislation, no individual can hold CSOP options over shares with an aggregate market value (measured at grant of the options) in excess of £30,000. Whilst this £30,000 limit may have been generous when CSOPs were first introduced some 38 years ago in 1984, this limit is now relatively modest and has made CSOPs an unattractive executive remuneration tool.

It is also the case that any company which has more than one class of share capital cannot establish a CSOP unless the majority of the shares of the class that are going to be subject to options are either “open market shares” (broadly being shares acquired by persons otherwise than by virtue of their employment with the company) or “employee control shares” (broadly being shares which have been acquired by persons who are employees or former employees of the company and which give the employees holding them control over the company). Many companies with more than one class of share capital have been unable to meet these requirements.

Proposed Changes

The Chancellor has confirmed that the government was “increasing the generosity and availability” of the CSOP. This is to be achieved:

  • by increasing the current £30,000 limit for CSOP options which qualifying companies may issue to employees, to £60,000, with effect for options granted on or after 6 April 2023
  • by removing the restriction imposed on companies with more than one class of share that the shares to be placed under CSOP options must either be open market shares or employee control shares, with effect for options granted on or after 6 April 2023

What does this mean for businesses?

The proposed changes to the CSOP regime represent a welcome development for businesses.

The increase in the individual limit on CSOP shares makes CSOP options:

  • a much more attractive incentive for mid-tier executives where the previous £30,000 limit was insufficient for delivering an appropriate level of incentive and reward
  • a suitable alternative to Enterprise Management Incentive options for companies which may be unable to grant such options by virtue of not meeting the statutory conditions (particularly where the number of employees exceeds 250 individuals, the company has gross assets exceeding £30 million or the business of the company consists of activities which are excluded by the EMI legislation)
  • a potentially viable incentive and retention tool for private companies which have more than one class of shares and the majority of the shares of the class to be put under option would not (prior to the time that the proposed changes take effect) have satisfied the “employee control shares” or “open market share” tests

In light of the anticipated changes summarised above, companies that do not presently operate a CSOP should consider whether the revamped CSOP regime presents a tax efficient way of delivering meaningful incentive and retention awards to their employees.

Companies that already operate a CSOP will also need to consider whether the provisions of their scheme rules need to be updated to take into account the increase of the £30,000 limit to £60,000, once that change comes into effect.

How Eversheds Sutherland can help

The Incentives Team at Eversheds Sutherland has extensive experience of advising on CSOPs and other tax advantaged employee incentive arrangements. We can advise on the arrangements which are appropriate for your business and assist you in implementing any such arrangements.

If you are interested in discussing the issues raised in this note, please do not hesitate to contact Mathew Gorringe or one of the other lawyers listed below.