CSOP – Worth Another Look?
According to HMRC statistics, the Company Share Option Plan (CSOP) is dead in the water. In 2000/01, around 415,000 employees were granted CSOP options, with a value at grant of over £2 billion. HMRC's latest figures (2011/12) show a mere 25,000 employees receiving CSOP options, with a measly grant date value of £170m.
For years, the Enterprise Management Incentive (EMI) has won all the plaudits – flexible, tax-efficient and easy to implement, it's got it all. And while CSOP's £30,000 individual limit, unchanged since 1996, is paltry, EMI's limit started high (£100,000) and has had increasing makeovers since then, culminating in a surprising – though welcome – increase from £125,000 to £250,000 in June 2012.
EMI is not available to everyone – once a company grows beyond that magic 250 employee limit, or operates in a non-qualifying trade, or breaches any of the other eligible criteria, the only tax approved option plan available is CSOP. We have in fact put in place many CSOPs for companies who could not make use of an EMI. The CSOP is also particularly useful for awarding to part time staff [under valuing part timers].
Have the recent Finance Act changes – and proposed future changes - made CSOP worth a second look? Or is it business as usual for this often overlooked option plan?
Changes under FA 2013 – using restricted shares
Since July 2013, it has been possible to place restrictions on shares used under CSOP so, for example, a different class of shares can now be used e.g. Shares which do not pay dividends or carry votes.
On the face of it that sounds like good news, providing more flexibility for the CSOP and perhaps enabling a lower share value to be agreed (due to the restrictions) and therefore facilitating a greater number of shares to be awarded within the £30,000 limit. Given that the restricted share would have unrestricted capital rights on a sale, this would seem to mean you now get more 'bang for your buck' with a CSOP. However, there is still a specific requirement in the legislation which can make this tricky.
The majority of the class of shares used under the CSOP must be either "open market" shares or "employee control" shares.
"open market": the majority of the shares must be held by non-directors or non-employees (which includes those who acquired their shares as a result of being a director or employee) "employee control": the people holding the shares must be employees/directors (or former employees/directors) of the company, or a subsidiary of the company and are together able to control the company by virtue of their shareholding.
It's probably fair to assume that the majority of companies that are concerned about using a flexible approach do not want to give control of the company to employee shareholders. So the usual way of dealing with this is to issue enough of the CSOP shares to non-employee shareholders to make the shares "open market". You will need to calculate what a majority is by reference to the number of CSOP options you plan to grant.
So, restricted shares under CSOP can be used, but still with additional complicated administration.
Future changes – online registration
One proposal made by the Office of Tax Simplification (OTS) in its Review of Tax Advantaged Employee Share Schemes (March 2012), was to remove the requirement for companies to seek advance approval of CSOP, SIP and SAYE from HMRC before awards are made under those plans.
This could result in time and cost savings to companies when establishing CSOP in the future. Currently, the company must submit draft documents, obtain informal approval, and then submit the final documents for formal HMRC approval before any option grants are made. That process can take 12-16 weeks, sometimes longer.
Allowing companies simply to make option grants under CSOP, and then notify HMRC after the event, should make the process quicker and easier – as is the case for EMI.
At the moment, HMRC are considering the OTS proposals and setting up tests for online registration. They anticipate this will be introduced in 2014 – but a sceptic would point to previous difficulties with government bodies and IT systems and suggest that is an optimistic launch date and it likely to be longer before the new system goes live.
Brutally, the changes to CSOP under FA 2013 are welcome but still limiting. We can't see them leading to an increased uptake of the plan.
Proposed changes to the approval process are still too far ahead to be taken into account at this stage.
So for the time being, EMI is still the best option plan available, provided your company qualifies.
One final point, however. The key advantage that CSOP has over EMI is that there is no company limit. The individual limit of £30,000 is not especially significant for a high level executive (except when used to top-up unapproved options). However, it may be ideal for middle managers or employees working further down the Company. It is perfectly possible to roll CSOP out to all employees; including those working too few hours to qualify under the EMI working time test (with the added bonus that CSOP remains a discretionary plan, so there is no obligation to do so).
There is no proposal to relax the qualifying trade criteria for EMI eligibility and therefore a CSOP, with an unlimited value of options available for the Company, is still for many the most worthwhile arrangement to implement.
For more information on any of the content covered in this article, contact Sarah Anderson via Sarah.Anderson@rm2.co.uk, or any member of the RM2 team on 020 8949 5522.