News & Insight
Don’t qualify for EMI? The CSOP may be your next best bet…
As discussed in our Insight piece earlier this month, HM Revenue & Customs (“HMRC”) recently published statistics on the use of employee share schemes (“ESS”) by companies during the 2017/18 tax ear.
Amongst the four HMRC approved ESS, enterprise management incentive schemes (“EMI”) remain the most popular scheme amongst UK companies. The popularity of EMI schemes has been mainly driven by the tax efficiency of the scheme. However, in order to implement an EMI scheme, the company must be able to meet certain requirements otherwise it will not qualify and the reliefs will not be available.
For example, to qualify for EMI a company must be an independent trading company with:
- fewer than 250 full time employees; and
- gross assets of no more than £30 million.
It is also important to note that certain trading activities will not qualify for EMI (such as property investment businesses or certain financial services).
If your company does not qualify, and yet you still wish to incentivise your workforce, you should consider setting up an alternative share plan. The company share option plan (“CSOP”) is usually worth looking at.
CSOP similar to EMI
As with EMI, CSOPs allow the following:
- companies may grant options on a discretionary basis – which means they can choose to benefit some or all employees (including the level of the given reward);
- the granted options can be tailored with different vesting conditions (which include objective performance targets);
- income tax or National Insurance Contributions will not usually be payable until the options are exercised; and
- on a sale of shares issued or transferred on exercise of options, the gains are subject to the capital gains tax regime.
However, it is important to note that CSOP schemes differ in the following ways from EMI:
- the price payable for shares on the exercise of a CSOP option must not be less than their market value on the grant date;
- the maximum value of shares that any one person can hold is £30,000 (EMI allows for £250,000);
- the CSOP shares will ordinarily need to be held for a three-year period to obtain the income tax relief on exercise; and
- Entrepreneurs’ Relief is not readily available unlike EMI options and the CSOP holder will need to hold the shares for a period of 12 months following exercise.
Another feature of the CSOP is that, unlike EMI, there is no overall company limit as regards the total value of shares under option for the whole company. Companies running EMI schemes cannot surpass the £3million overall threshold as regards the value of the EMI shares granted.
CSOP have been established since 1984 by HMRC. The number of companies implementing non-EMI HMRC schemes has dipped since 2007/08 by 9%. However, HMRC highlighted that CSOPs are the only types of non-EMI scheme which have reversed this trend and are on the increase.
For further information on how you to set up a tax-advantaged share scheme, and advice on share options generally, please contact firstname.lastname@example.org.
This piece was researched and prepared by Amir Kursun, with input from Jeremy Glover and Nick Westoll.
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