As of 6 April 2023, changes have been made to HMRC tax-advantaged option schemes. These changes are summarised here:
- Company Share Option Plan (CSOP) value limit – increased from £30k to £60k per employee.
- CSOP removal of restrictions on share class to be used.
- Employee Management Incentive (EMI) removal of requirement to sign a working time declaration.
- EMI removal of requirement to itemise restrictions over shares.
CSOP changes
The increase in the value of shares that can be subject to CSOP options has increased to £60k. Whilst this is still significantly lower than the equivalent £250k limit for EMI, it is a welcome and long overdue increase. Considering that it is usually possible to negotiate discounted share values with HMRC, the £60k limit may prove enough incentive for second tier, and in some cases, first tier management.
The removal of restrictions on share class for CSOP is also a welcome change. The historic rules made it difficult for companies with multiple share classes to operate a CSOP or prevented them from granting options over minority share classes. The changes now allow for CSOP options to be granted over growth shares or other bespoke share classes. The use of CSOP options over growth shares allows for more shares to fit within the £60k limit, allowing for a viable incentive for first tier management.
EMI changes
The EMI changes are also welcome. The removal of the requirement to sign a working time declaration is retrospective, applying to EMI options exercised post 6 April 2023, even if granted earlier. It must be noted, it is still a requirement that the option holder meets the working time requirements (working 25 hours per week or spends 75% of their time working for the employer or group company).
Similarly, the removal of the requirement to itemise restrictions over EMI shares is also retrospective, applying to options exercised post 6 April 2023, even if granted earlier.
The lack of signed working time declarations and/or the itemisation of share restrictions had often been omitted in EMI scheme documentation, only to then be picked up on a due diligence exercise, creating concern and uncertainty to the tax status of the ‘defective’ option agreements. Removing these requirements should significantly help facilitate a smoother due diligence process where EMI options are involved.
Further EMI changes due
There are further changes due from 6 April 2024, whereby the notification of EMI options to HMRC will change from being an ‘in-year’ requirement reportable within 92 days of grant to being reportable by 6 July, following the end of the tax year of grant.
Whilst the extra time to notify may prove useful, it may present greater risk for employers. For example, if the person responsible for filing the notification leaves the business before the end of the tax year, it is possible that their successor will not be aware of the requirement. Missing the notification deadline can be a serious issue for employers, as it removes the EMI status of the option, meaning the exercise is likely subject to PAYE/NIC instead of favourable rates of Capital Gains Tax (CGT).
Employers and their advisors will need to ensure they have procedures in place to minimise the risk of EMI notification falling through the cracks.
Get in touch
If you wish to discuss how the above changes will affect you, please get in touch with David Bareham, Share Schemes Director, or our Share Schemes team.