16 May 2023
Changes have taken effect from 6 April 2023 in respect of rules regarding both enterprise management incentives (EMI) share options and company share option plan (CSOP) options. These are simplifications, recognising the value of these important tax effective employee incentive tools and making it easier for companies to implement such share plans.
EMI and CSOP – an overview
The EMI and CSOP schemes are the only UK tax-advantaged share option plans allowing employers to select participating employees, rather than having to offer options to all eligible employees. As a result, both form an important part of the incentive and reward landscape for key talent within many UK businesses.
Broadly, the tax advantages allow employees acquiring shares to be taxed in a similar way to shareholders who are otherwise unconnected with the company, with increases in value being taxed as capital gains and, where qualifying conditions are met, benefitting from business asset disposal relief.
This means employers do not normally have to account for income tax or National Insurance contributions under PAYE in respect of options granted under EMI or CSOP arrangements. However, despite the employees benefitting from the more favourable capital gains tax treatment, employers may be able to claim a corporation tax deduction in respect of the difference between the market value of the shares acquired by employees and the price they pay for them when they exercise their options. These tax benefits are subject to conditions.
Under qualifying EMI plans:
- options can be granted over shares with a market value (at the date of grant) of up to £250,000 per individual employee;
- the employing company can choose the class of share and the price participants pay for the shares (though not normally lower than nominal value) making EMI a potentially attractive means of rewarding participating employees from the perspective of both the employer and employee; and
- there are limits on the size and trading activities of a business.
Where EMI is not available, companies will often turn to a CSOP as an alternative.
By comparison to EMI, a CSOP has typically been seen as less generous. For example, prior to 6 April 2023 it allowed options over shares with a maximum value of only £30,000 per employee at the time of grant, compared to the EMI limit of £250,000.
Additionally, before 6 April 2023, the classes of share that options could be granted over under a CSOP were restricted to those that were deemed ‘worth having’ by virtue of being either:
- ‘open market shares’, the majority of which are held by outside investors; or
- a class of shares giving ‘employee control’ of the company.
In practice, this rule has meant that many companies could not benefit from a CSOP. For example, neither of the above requirements would be met in many circumstances where the founders of the business or third-party investors hold a different class of share to the employees, which may often be a commercial requirement.
From 6 April 2023, there is no longer a statutory requirement:
- to include details of restrictions attached to shares within option agreements; or
- for a working time declaration to be signed confirming the option holder meets the required working time qualifying condition.
The removal of the signed declaration does not, however, also remove the requirement to meet the working time condition.
From 6 April 2024, the deadline for notifying EMI option grants to HMRC will be extended from 92 days after grant to 6 July following the end of the tax year in which the options were granted.
These are welcome changes for employers that can otherwise fall foul of the complex EMI legislation for seemingly innocuous administrative errors, resulting in higher than expected tax liabilities and professional fees in seeking to address mistakes, some of which it may not be possible to correct.
Changes to the CSOP regime from 6 April 2023 are even more wide-reaching.
- The £30,000 limit on the value of shares that can be granted under option has been doubled to £60,000, measured at the date of grant.
- There is no longer a requirement for options to be granted over ‘open market’ or ‘employee control’ shares.
These changes pave the way for many more companies to make use of CSOP options, where previously they were unable to do so. For example companies that already have multiple classes of shares in issue, or those that wish to use non-voting shares for employees, are now able to consider using a CSOP.
What this means in practice
These changes are a welcome step forward.
The relaxation of certain administrative burdens for EMI plans is expected to ease the operation of these plans for businesses. Changes to the CSOP rules reflect a policy decision to assist companies that have grown beyond the scope of EMI to continue to attract, incentivise and retain their key talent, thereby removing the cliff edge penalty for companies that continue to grow.
Both the EMI and CSOP schemes retain a number of other legislative requirements, and professional advice should be sought regarding the set up and administration of such plans on an ongoing basis. Alternative employee incentives arrangements might also be considered, which may be more suited to an employer’s specific requirements.