How does a Company Share Option Plan (CSOP) Work
Starting a Company Share Option Plan (CSOPs): What you need to know
A Company Share Option Plan (CSOP) is a tax-advantaged, discretionary share option plan where a company can grant CSOP options to any employee or full-time director. An employee must purchase shares at an exercise price that is not less than the market value of the shares on the date the option was granted.
The number of employers implementing CSOP options is increasing for UK businesses. Typically private and public companies operate CSOPs or occasionally the UK subsidiary of a foreign parent company might implement a CSOP option scheme over the foreign parent’s share plan.
CSOPs also attract tax advantages, but compared with EMI Option Schemes which we discussed in the last week article, the law governing them is much less flexible and governs, for example, when options can be exercised.
What are the advantage and disadvantages of a Company Share Option Plan?
ADVANTAGES
Tax advantaged scheme which means that:
✔️ Employee benefits
(a) if a CSOP option is granted with an exercise price at least equal to the actual market value of a share at the date of grant and is exercised on or after the 3rd anniversary of the date of grant (but before the 10th anniversary)
no income tax or NICs will be payable when the option is exercised;
(b) if a CSOP option is granted with an exercise price at least equal to the actual market value of a share at the date of grant and is exercised before the 3rd anniversary of the date of grant as a result of the option holder leaving the company by reason of certain good leaver reasons, or certain takeover events no income tax or NICs will be payable when the option is exercised;
(c) CSOP options granted at least 2 years before the option shares are sold may qualify for Business Asset Disposal Relief if they represent 5% or more of the company;
✔️ Company benefits
(d) there is potentially corporation tax relief available for the company on the acquisition of shares following the exercise of a CSOP option;
(e) the company can elect to pass on employer's NICs to the employee who is granted the option;
(f) the company can make use of a corporation tax deduction on the set up costs of the scheme
✔️ Doesn’t need to be offered to every single employee, the company can choose who it wishes to grant options to
✔️ Existing shareholders are only diluted if and when the employee exercises their option
DISADVANTAGES
❌ The company must be a qualifying company
❌ Employees who have a “material interest” in the company will not be eligible
❌ CSOP options can’t be exercised before the 3rd anniversary of the date of grant save in very specific circumstances- if they are, the tax advantages are withdrawn
❌ Governing law is less flexible and more restrictive about how the scheme can work
❌ A valuation will need to be carried out by the company and agreed with HMRC prior to making any grants
❌ The limit on how many CSOP options individuals can hold is low
❌ Self-certification to HMRC is required
❌ Registration of the scheme and grants as well as annual filings are required within strict time limits
When to use Company Share Option Plan (CSOP)?
✔️ options are intended to be granted to some employees and not others
✔️ employees are not already shareholders of the company
✔️ each employee will be getting a relatively small amount of options
✔️ employees are comfortable waiting for 3 years before they can exercise the option most if not all employees are UK resident
There are specific statutory criteria that every CSOP option scheme must follow. This will be adhered to through the CSOP Option plan which is a written contract between the company and the employee and will contain:
✔️ The date of grant of the options
✔️ The number of shares under option
✔️ The exercise price
✔️ How and when the option can be exercised
✔️ Whether the exercise price is the actual market value of the shares at grant
✔️ Restrictions on the shares
✔️ Optional performance conditions
Disclaimer: the guidance contained in this article is not a substitute for legal advice. Before implementing any option scheme, you should seek appropriate advice from a qualified legal professional.
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Relevant guide to EMI Share Option Schemes:
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