Employee Share Ownership - Changes to the Company Share Option Plan (CSOP)

Successive governments have recognised the benefits of employees having a shareholding stake in their employer business. The Government is looking at ways of boosting the take up of employee share schemes and has made changes to a number of tax advantaged employee share schemes to increase their reach and simplify them. This blog looks at the recent changes to the Company Share Option Plan (CSOP).

CSOP – short summary

A CSOP is a tax-advantaged share scheme, which allows companies to incentivise its employees by granting an "option" to employees. An option is a right to acquire shares in the future at a price reflecting the market value of the shares at the date the option was granted. This means that no income tax nor National Insurance contributions are charged on the grant or exercise of the CSOP option after a certain period. To benefit from the tax advantages, a CSOP option must be exercised in the period between three and ten years from the date of grant.

CSOP options tend to be used by listed or unlisted companies that cannot grant options under EMI, which tends to be the "go to" share option plan for qualifying companies given its more generous tax reliefs and flexibility. You can find details of qualifying requirements for EMI here. Unlisted companies can only use CSOP if they are not under control of another company.

CSOP arrangements may have been overlooked by companies in the past, as in practice companies that are unable to grant EMI options may not consider CSOP options given the requirements of the scheme and decide to grant options under a non-tax advantaged scheme instead. However recent changes to CSOPs may cause companies to reconsider that approach.

6 April 2023 changes to CSOP

The two changes to the CSOP regime which took effect from 6 April 2023 are:

• the £30,000 limit on the grant of options to an employee increased to £60,000; and
• the removal of the strict share class requirement (known as the 'worth having' shares restriction) which broadly states that shares eligible for CSOP must be employee-controlled shares or open market shares - in other words, shares that are worth having.

The increase of the financial limit is great news to companies that are unable to grant options under the EMI schemes due to being too large or because they do not carry on a qualifying trade for EMI purposes. The £30,000 limit had not increased for a long time, and the attractiveness of CSOP had eroded due to inflation.

However, the removal of the 'worth having' shares restriction is probably the 'better' news. This means that companies with different classes of shares will no longer need to worry about whether this restriction would apply to them so long as the shares are ordinary shares. This should result in more companies being able to grant options under CSOP.

These new changes are significant changes to the CSOP regime.

There are however other advantages of setting up a CSOP scheme:

• Any company can grant CSOP options (which includes a company incorporated outside the UK), provided it is not under the control of another company. CSOP schemes are not targeted at small high growth companies in the way that EMI schemes are – so more companies are likely to qualify.

• It’s a discretionary plan – a company can choose particular full-time directors or employees to benefit and doesn't need to offer awards to all employees.

How Brodies can help

Please contact a member of the Corporate Tax & Incentives team if you would like more information or specific advice on choosing the right employee share incentive scheme for your business or if you're interested in implementing a CSOP.