Company Share Option Plans: the alternative to EMI?

This post is part of our Entrepreneurial team’s regular series of blogs.

Over the past few months, as companies have been seeking alternative methods of employee incentivisation with less impact on short-term cashflow, we have seen a considerable increase in requests for share schemes and incentives.

The obvious port of call is the Enterprise Management Incentive scheme, being the most tax advantageous available. However, certain trading activities do not qualify for EMI, and employees must meet a working time requirement to qualify, so we have been increasingly looking to other tax-advantaged ways of providing share incentives.

The Company Share Option Plan has become more prominent as an alternative – particularly where a low valuation can be agreed with HMRC, as there is a low cap on the value of shares an employee can be granted under a CSOP at £30,000. (As mentioned by my colleague Thomas in his recent blog, this happens to be a good time to be agreeing low valuations with HMRC due to the impact of the pandemic on many small companies.)

A CSOP is fairly inexpensive to implement, has no tax implications for the recipient on grant and can result in only a 10% or 20% Capital Gains tax charge on sale of the acquired shares, if the option has been held for at least 3 years. Additionally, the company can avail itself of a corporation tax deduction on exercise, equal to the difference between the market value at exercise and the price paid by the employee.

The common understanding is that share schemes are used in high-growth companies or large established businesses seeking to incentivise senior management as part of a remuneration package. The CSOP, however, provides an opportunity for many small businesses to give employees an additional incentive to push growth in the company leading to a sale or acquire a shareholding to provide a dividend stream or starting point for a management buy-out.

It may not be talked about as often, but the CSOP provides obvious benefits to companies and individuals who would fall foul of the EMI qualifying criteria. The tax implications are certainly more advantageous than simply issuing shares to employees, as discussed by my colleague Sarah recently.

Our team are experts in advising companies on the best share scheme and how to structure to ensure the maximum benefit for the company and employees. In the case of a CSOP, a valuation must be agreed with HMRC in advance of granting options. Talk to us to find out more about how this could benefit your business.