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Employee engagement is crucial for any business’s success. One effective way to engage your employees and align their interests with your company’s performance is to allow them to have a small stake in the company. The Company Share Option Plan (CSOP) is a government-backed scheme in the UK that enables employers to offer tax-advantaged share options to their employees. This article will explain how the CSOP scheme works and highlight several legal considerations a CSOP involves.
What is a CSOP?
The Company Share Option Plan (CSOP) is a tax-advantaged share options scheme. The CSOP can give your company a framework to reward key employees and full-time directors. By granting options, you give individuals the right to acquire company shares at a fixed price in future. The CSOP scheme incentivises employees to remain with your company long-term and perform in their roles.
The following table outlines several critical features of the CSOP.
| Key Feature | Explanation |
| Individual eligibility | Companies can grant CSOP options to employees and full-time directors. Unlike the Enterprise Management Incentive (EMI) scheme, there is no minimum amount of time an employee must work in your company per week to be eligible for the scheme. Part-time or non-executive directors do not qualify under this employee share scheme. |
| Company eligibility | If your company does not qualify for the EMI scheme, it may still be eligible to implement a CSOP. The EMI scheme has specific company eligibility requirements, but the CSOP scheme does not impose the same restrictions, such as limits on the size of eligible companies. |
| Exercise period | Employees must exercise their share options three to ten years after the grant. If an employee exercises the option after at least three years, no income tax or national insurance contributions are payable, provided that the pre-determined price of the options is at least their market value at the time of grant. |
| Tax benefits | Tax advantages are the primary benefit of this scheme. Employees can purchase their shares by exercising their options without incurring income tax or paying national insurance contributions, provided the exercise meets certain conditions. However, capital gains tax may apply if the employee later sells their shares at a profit. |
| Option limit | There is a £60,000 limit on the value of options an employee can hold at a time. |
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Legal Considerations for Implementing a CSOP
1. Qualification Criteria for Employers
Despite the CSOP scheme imposing fewer eligibility requirements than the EMI scheme, not all companies can implement a CSOP. Companies must meet specific qualification criteria to offer CSOP options to their employees. The following table outlines these criteria.
| Criteria | Explanation |
| Structure | Private and listed companies can use the CSOP scheme. |
| Grantor | Either the employer or the parent company must grant the options. |
| Share class | You must ensure that the shares over which your company grants options meet HMRC’s definition of ‘ordinary shares’. |
2. Draft Your CSOP Rules
Before implementing a CSOP, you must draft a set of rules for the plan. These rules should cover aspects such as:
- when individuals can exercise their options (this should be at least three years after the grant unless certain exceptions apply);
- whether individuals need to satisfy certain conditions, such as meeting particular performance targets, to exercise their options; and
- what will happen if an employee or director holding options leaves before the three-year vesting period ends.
You must ensure that the rules comply with HMRC’s CSOP rules. Otherwise, you risk triggering unexpected tax liabilities and facing legal disputes. Having well-drafted CSOP rules ensures that the scheme operates smoothly and that your employees understand their rights and obligations.
3. Tax Compliance
You should agree on a share valuation with HMRC before granting CSOP options. To do this, you can contact HMRC directly, providing the following information:
- your proposed valuation;
- three years of accounts; and
- any additional relevant information.
If you do not comply with HMRC’s CSOP rules, you risk employees losing their tax benefits, which can have severe consequences.
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Key Takeaways
The Company Share Option Plan (CSOP) is a valuable tool for enhancing employee engagement and rewarding loyalty. By offering employees tax-advantaged share options, you can motivate your team, retain talent, and share company ownership. However, implementing a CSOP involves careful legal and tax planning.
It is best practice to seek professional advice when implementing a share options scheme. Consulting legal and tax experts can help you ensure that:
- your company qualifies for the scheme;
- you draft comprehensive and compliant plan rules;
- your employees benefit from the scheme’s tax advantages; and
- you minimise the risk of future legal disputes.
If you require legal advice about implementing a share options scheme, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Employees who exercise options after three years (at market value) do not pay income tax or national insurance contributions.
Unlike the EMI scheme, you can grant options to any of your company’s employees. However, only full-time directors will qualify for the scheme.
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