Save Our CSOP!
If you have the choice of an HMRC tax advantaged Company Share Option Plan (CSOP) or an Enterprise Management Incentive (EMI) share option plan, you are likely to choose and EMI. But for those who do not have the opportunity of an EMI plan, the CSOP is a viable alternative.
Despite this, recent statistics published by the government indicate a sharp decline in usage of the CSOP, from 3,030 plans in operation in 2006, to 1,380 plans in April 2013.
During the same period, the number of employees awarded CSOP options dropped from 120,000 to 25,000.
Under a CSOP, a company can offer selected employees up to £30,000 of shares under option. The arrangement allows employees to purchase shares in their employer company at a price fixed from the outset, and allows them to benefit from advantageous tax treatment provided the options are held for at least three years.
If participation rates continue to fall, the chairman of the Employee Share Ownership Centre, Malcolm Hurlston, has recently told the Financial Times that the plan could be dropped.
What are the reasons for the decline?
Most people will be somewhat familiar with the highly lauded EMI share option plan. Since its introduction in 2000, the EMI has become incredibly popular, largely thanks to the numerous improvements that have been made to this highly tax advantageous scheme since its inception.
The benefits of the EMI, relaxation for the eligibility to Entrepreneurs’ Relief for EMI option holders (allowing them to benefit from an effective 10% tax rate on gains), ability to use a class of non-voting shares, and an increase in award limits to £250,000 per employee, all point to potential reasons why this arrangement is supplanting its CSOP counterpart.
What use is a CSOP?
If yours is a property related company (hotels, nursing homes, etc.), or related to stockbroking, accountancy, or rentals, leasing or licensing or assets, or the gross assets exceed £30million, or have more than 250 full time equivalent employees, then it is among the companies prohibited from using an EMI plan.
We find CSOP options are particularly appropriate for larger professional or financial services companies who want to provide opportunities for selected employees and directors to build up a shareholding stake. This is especially useful for well established companies that have no immediate plans to sell or list or have a similar exit.
Save our CSOP!
With its heightened benefits, it seems obvious that we would usually recommend companies implement an EMI where possible. However, as share scheme specialists we still recognise situations where a CSOP is an appropriate and indeed a valuable share plan for a multitude of companies.
This may very well be the case where a company has grown too large to grant EMI options, or its trading activity excludes it from doing so, though it still wants to provide tax efficient share options to employees. In such situations the CSOP still provides significant benefit over a non-tax-advantaged option plan, so these arrangements should not be dismissed out of hand.
Whilst the £30,000 per participant limit may sometimes prove off-putting, particularly when compared to the £250,000 EMI limit, it is important to remember that this relates to the share value as at date of option grant. If significant growth is anticipated, then the value for employees when options are exercised can be substantial.
When discussing CSOP with our clients, we might recommend they implement a top up arrangement, where necessary, using a non-tax advantaged plan which largely mirrors the CSOP. These are relatively cost effective to establish and provide a larger net gain for participants when used in conjunction with a CSOP, than if a purely non-tax-advantaged plan had been implemented.
If you would like to find out more about the CSOP, we would love to speak with you. Kerrie Willis, our main point of contact on all things CSOP, can be reached on email@example.com or 020 8949 5522.