UK: Company Share Ownership Plan (CSOP)

Last Updated: 12 August 2013
Article by Smith & Williamson

CSOPs were introduced in 1984 to encourage employees to own shares in their employing company or, if a group of companies, in the parent company. Awards under a CSOP are commonly used as a means of rewarding, incentivising or retaining employees or for a combination of these objectives. The CSOP can be operated on an 'all employee' basis but is usually used on a selective basis.

It is common for the options to be awarded with certain conditions which must be achieved before the option vests and the employee is entitled to exercise the option. These objectives can be aligned to the business objectives and can set goals specific to each employee; ensuring the employee focuses on the key business drivers.

What is a CSOP?

CSOPs, which are commonly used by listed and privately held companies, are an HM Revenue & Customs (HMRC) approved share option plan designed to encourage employees to own shares in their employing company and to participate in the growth of the company. The employee can at any time hold options over shares to the value of Ł30,000 at the date of grant.

Why use a CSOP?

The main benefit of the plan is that employees can acquire shares in the company without incurring an income tax liability and can participate in the increased value of shares at capital gains tax rates. In addition, neither the award of the options or the exercise of the options gives rise to a national insurance liability which is advantageous to both the employee and the company.

Employees value both the tax-efficient nature of the plan and the opportunity to participate in the growth of the company which in turn can have a positive impact on motivation and retention.

How does a CSOP work?

The employee is awarded options over shares in the employing company (or if a group in the parent company) with an exercise price not less than the market value of the shares at the date options granted. The option deed will specify what conditions must be satisfied before the option will vest and will set out the earliest date on which the options may be exercised. To maximise the tax efficiency the options should be capable of being exercised between 3 and 10 years from grant.

When the conditions are satisfied the employee can exercise the option paying the agreed price. The employee then owns the shares and will be subject to capital gains tax when the shares are sold.

Accounting

Under both UK GAAP (current and FRS 102) and IFRS the CSOP will be regarded as a share-based payment arrangement, with the detailed accounting treatment being determined by reference to the terms of the plan.

Share-based payment arrangements can be either 'equity-settled' or 'cash-settled'.

When the CSOP is accounted for as an equity-settled arrangement, the charge to the profit and loss account is calculated by reference to the fair value of the options at grant date determined using an appropriate financial model. The period over which the charge is made will be determined by the terms of the arrangement. The charge will be adjusted in each year to take account of the company's expectation of the number of options that will ultimately vest. When the CSOP is accounted for as cash-settled, the fair value of the future liability is re-measured at each reporting date and again at settlement. Advice should be sought as it is not always certain which accounting method will apply and this may vary between the group and subsidiary level.

In circumstances where an employee benefit trust is used to facilitate the arrangement, although the shares will be held in a separate trust, both UK GAAP (current and FRS 102) and IFRS require that the shares are reflected in the accounts of the company.

Corporation tax

The employer will usually qualify for a corporation tax deduction when the employee exercises the options equal to the difference between the exercise price and the market value of the shares on exercise.

Income tax and NIC

No income tax or national insurance liability arises on either the grant of the option or on approved exercise of the options. There are special provisions for redundancy and retirement.

If the employee exercises the option other than in an approved manner, then an income tax liability will arise on the difference between the market value of the shares on exercise and the price paid to exercise the options. For companies which are listed, or where there is a market for the shares, income tax will be collected through PAYE and there will also be a national insurance liability.

Capital gains tax

A capital gains tax liability will arise when the employee disposes of the shares. The chargeable gain will be based on the sale proceeds less the price paid to exercise the option and the amount on which any income tax liability arose on an unapproved exercise, subject to the special rules for share cost 'pooling' where the employee also holds other company shares.

For whom is a CSOP suitable?

The use of a CSOP is particularly attractive to the types of employers mentioned below.

  • Companies seeking to align the employees' interests with those of the company and other shareholders to ensure growth.
  • Companies looking to lock-in key employees in the medium term.
  • Companies seeking to encourage share ownership through tax efficient share acquisition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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