Finance Bill: Employee share plan changes

Increased flexibility and simplifications for tax-advantaged employee share options.

Finance Bill: Employee share plan changes

The Finance Bill contains clauses to implement easements to certain tax-advantaged employee share plans, which were announced at the Growth Plan statement (or ‘mini-budget’) in September 2022 and the Spring Budget in March 2023. Changes to the Enterprise Management Incentives (EMI) regime – the most generous and flexible tax-advantaged employee share plan aimed at qualifying growth companies – will make it easier to operate and reduce the risk of administrative oversights jeopardising access to the intended tax advantages. Additionally, the tax-advantaged Company Share Option Plan (CSOP) regime will become more generous, and some restrictions on the type of shares that can be subject to option will be removed. This article sets out some of the Finance Bill’s details and practical points.

Tax-advantaged EMI options

From 6 April 2023 it will no longer be necessary for restrictions on the underlying shares to be set out in EMI option agreements, or for employees to make a written working time declaration (though employees must still work for the relevant company or group at least 25 hours per week or, if less, at least 75 percent of their working time, to be eligible for EMI). These easements apply to options granted on or after 6 April 2023 and to options granted before 6 April 2023 which are exercised on or after that date.

This means that omitting relevant restrictions from the option agreement, or failing to obtain a working time declaration, will not cause options granted before 6 April 2023 to lose their EMI tax advantages if they are exercised on or after that date (but if this would otherwise cause one or more of the financial limits on EMI options to be breached, special rules determine which of these options will benefit from EMI tax relief and which will not, though we expect these to apply only rarely in practice).

We understand that, in line with their current approach, HMRC will consider on a case-by-case basis, what effect omitting share restrictions from the option agreement, or failing to make a working time declaration, has on the tax treatment of EMI options which are both granted and exercised before 6 April 2023. From 6 April 2024 the deadline for reporting the grant of an EMI option will be extended to 6 July following the end of the tax year. Prior to that date, EMI options must be notified to HMRC within 92 days of the date on which they are granted (any failure to notify within this time limit without a reasonable excuse will result in a loss of EMI tax advantages). Other practical implications of these changes are set out in our article on the relevant Budget announcements.

Tax-advantaged CSOP options

For options granted on or after 6 April 2023, the limit on the market value of shares that an individual employee can hold subject to unexercised CSOP options will increase from £30,000 to £60,000. For these purposes, the market value of the relevant shares is measured on the date on which an option is granted (and in certain circumstances is taken into account when assessing compliance with the EMI limits – see above).

For companies with more than one class of share in issue, the requirement that CSOP options must be over ‘open market’ or ‘employee control’ shares will be removed for options granted or exercised on or after 6 April 2023. More companies with multiple share classes will therefore be able to grant CSOP options, and companies will be able to issue further classes of shares without affecting the qualifying status of any CSOP options employees already hold.

The Finance Bill provides that from 6 April 2023 existing CSOP plan rules will have effect with any modifications needed to reflect these changes. Nevertheless, companies should consider whether it would be better to amend their plan rules to reflect the revised legislation from 6 April 2023, so that out of date legacy wording in the plan documents does not cause errors in the future administration of the plan.

Commercial implications of these changes (including for companies that ‘outgrow’ the EMI regime) are discussed in our earlier article.

Tax-Advantaged Save-As-You-Earn (SAYE) options

Reductions to the Capital Gains Tax annual exemption announced at the Autumn Statement 2022 will also take effect from 6 April 2023. The potential impact of these changes on employees who hold tax-advantaged SAYE options, and steps employees might consider in response, are discussed in our previous article. We still, however, await HM Treasury’s publication of the outcome of the review into SAYE bonus mechanism.

What happens now?

Though these provisions might be amended during the Finance Bill’s passage through Parliament, we expect them to be enacted in substantially their current form.

Please reach out to this article’s authors, or your usual KPMG contact, if you would like to talk through what these changes mean for your employee share plans and wider employee value proposition.