Fiscal Event: A refresh for tax-advantaged Company Share Option Plans

From 6 April 2023, access to tax-advantaged CSOPs will widen and the scheme will be more generous - here’s what employers need to know.

From 6 April 2023, access to tax-advantaged CSOPs will widen

As part of the UK Government’s ‘Growth Plan’, changes will be introduced from 6 April 2023 to more closely align Company Share Option Plans (CSOPs) with the more generous and flexible tax-advantaged Enterprise Management Incentives (EMI) scheme available to qualifying growth companies. By easing the qualifying conditions and increasing the limit on the value of shares that can be under option, CSOPs will become available to more companies and a more attractive incentive. This is likely to be of particular interest to independent companies that do not meet the requirements to grant EMI options, and those that do not currently qualify for CSOP due to their multi-class shareholding structure. This article summarises the expected changes, and how employers might consider including a CSOP as part of their total employee value proposition.

What’s a tax-advantaged CSOP?

CSOPs are a form of tax-advantaged discretionary share plan. As companies can choose which eligible employees participate, and awards can vary between individuals, they can be used to grant options either to selected executives or for a wider employee population, but on a more flexible basis than tax-advantaged ‘all employee’ plans such as ‘Save As You Earn’. Under a CSOP, eligible employees can currently be granted options over shares worth up to £30,000 on the date of grant.

Generally, employees will not pay income tax or social security when they exercise CSOP options three or more years after the date of grant, or if certain conditions are met on an ‘early’ exercise. In these circumstances, there should be no employer’s social security to pay either.

A company must meet certain conditions to implement a CSOP. The Company must not be under the control of another company and, at present, if more than one share class is in issue, options must be granted over shares of a class which:

  • Are ‘open market shares’ (broadly, shares which are held by persons other than employees or directors); or
  • Give current and/or former employees and directors control of the company.

Currently, some companies with multiple share classes (e.g., those with one or more external investors) are prevented from implementing a CSOP as they are unable to meet this requirement.

What are the proposed changes?

Two significant changes are expected from 6 April 2023:

  • The restriction that options must be granted over shares from either an ‘open market’ or ‘employee control’ class will be removed; and
  • The maximum value of shares, measured on the date of grant, which can be subject to unexercised CSOP options held by an individual employee, will double to £60,000.

These prospective changes will be particularly welcomed by companies that are currently unable to implement CSOPs due to their multi-share class structure, as such companies which don’t meet the requirements to grant EMI options will, from 6 April 2023, be able to grant discretionary tax-advantaged share options.

Additionally, companies which qualified to grant EMI options, but which ‘outgrew’ that scheme (or which will shortly do so) might now benefit from a more flexible and generous next stage option plan, facilitating more inclusive equity incentive awards to support future growth without the need for more bespoke share purchase plans.

What should employers do?

Your next steps will depend on whether or not you already have a CSOP in place:

  • CSOP arrangement already in place?

The plan rules should be reviewed to assess whether they permit options to be granted over shares up to the new financial limit – if not, the plan rules may be amended to permit higher grants from 6 April 2023. Further updates to the plan documents might also be required, especially if a legacy CSOP plan has laid dormant for several years. Whilst the detail of the new legislation is not yet published, preparatory work can begin now.

  • EMI arrangement already in place but ceased or likely to cease to qualify (i.e., due to growth or a change in trade)?

A CSOP may now be an attractive follow on incentive plan – a full review should be undertaken to assess whether a CSOP or another equity arrangement would best meet your future needs.

  • Non-tax-advantaged option plan or share subscription plan in place as CSOP was too restrictive?

You may wish to revisit a CSOP arrangement as, from the next tax year, it may become suitable for your business. We can help you weigh up the merits of implementing a new CSOP or sticking with what you’ve got, both for prospective new awards and any subsisting awards.

The tax advantages available under a CSOP arrangement are significant (for both employer and employee) and it is therefore worthwhile considering now whether such an arrangement would work for you in 2022/23 given the relaxation in share requirements and the increase in plan limits.