The Government’s proposed review of the Company Share Option Plan (“CSOP”) in the Spring Statement
So the government concluded in the recent Spring Statement that the current Enterprise Management Incentive scheme (“EMI”) remains effective and appropriately targeted. Hmmm….. – most advisers would agree that the government should have had more appetite for change and actually attempted to reduce some of the more esoteric intricacies to EMI qualification and retaining EMI tax advantages noted in earlier blogs. However, we are where we are!
In the very small print of the Spring Statement, it appears that the scope of the government review will now be expanded to consider if the other discretionary tax-advantaged share option scheme, the Company Share Option Plan (“CSOP”), should be reformed to support companies as they grow beyond the scope of EMI.
Given the lack of action in relation to EMI (where the government’s energies would undoubtedly have been best placed), RM2 would not “bet the house” on a seismic change in relation to CSOPs being decided upon by the government.
However, there are a handful of headline areas in relation to CSOPs which would be welcome if they were to be amended and provide a useful boost to the appeal of CSOPs.
Firstly, CSOP options may not be granted to an individual over shares with a market value of more than £30,000 (valued at the date of grant of the option). This limit has not changed in recent times and is now “out of kilter” with the expectations of senior employees and directors as a key incentivising tool. By contrast, the individual limit for EMI is currently £250,000 (again valued at grant).
Secondly, the tax advantages relating to a CSOP are only normally available where the options have been held for a period of at least three years. This can be seen as lengthy given modern working patterns (and no such requirement exists for EMI). Exercise of CSOP options within three years as a result of a takeover can in certain circumstances be income tax free. However, the requirements of the CSOP code as to the form of consideration payable on such a transaction result in anomalies from one deal to the next.
Thirdly, CSOP qualification requires certain additional hurdles to be cleared if the company whose shares are being placed under option has more than one class of share (a common occurrence where there are founder, investor and/or employee shareholders). We understand that these additional requirements were originally intended (more than 25 years ago) to stop employers creating an inferior class of “employee shares”. However, these tests can often stop a company from being CSOP qualifying and interestingly it was not felt necessary to introduce the same features under EMI when introduced in 2000. One wonders if these hurdles are still truly required as a protection for employees (rather than just as a trap for the unwary client/adviser).
We await with interest more details on the proposed CSOP review and hope that the policymakers have more appetite for change than they did with EMI.
If you would like to speak to us regarding a CSOP or EMI for you or a client drop a line to firstname.lastname@example.org and we can arrange a time in the diary for a call.