A.) CSOP and EMI share schemes are great options when considering a tax-advantaged share scheme available to employees. They have some similarities but some striking differences which might change your perspective on which is favourable for your business. Those similarities and differences can be divided into two sub-sections: eligibility and taxation.
Eligibility
If you’re looking for a share option which has very little hurdles to jump through you may find CSOP an attractive option. Not only does CSOP has very few requirements from the employee’s point of view. I.e. only excluding directors who are expected to work 25 hours or more and a requirement for material interest being no more than 30%. Material interest meaning having more than 30% of the share capital of the business. (See ITEPA 2003 Sch 4 part 3).
For example, Emily holds 45% of the share capital in the form of EMI shares and another 5% in the form of ordinary shares. She will not be eligible for CSOP because her total share capital exceeds 30%.
But CSOP also have far fewer conditions for the business to qualify. Most notably the conditions CSOP companies must meet are, must be listed and must not be a 51% or more subsidiary of another company. (See ITEPA 2003 Sch 4 part 4). Like EMI, CSOP can also be discretionary meaning they can exclude some employees – with absolutely no requirement to include certain individuals. However, whilst CSOP does have a very limited number of conditions, it is important to note the maximum amount eligible to be granted for CSOP is £60,000 per employee (Previously £30,000). Whereas, as you know EMI has many more conditions to fulfil, but whilst this many seem like a fault of the share scheme, EMI has a lot of advantages, as you know.
So, as a business you would need to consider whether it would be beneficial to invest in EMI or CSOP based on the eligibility and their respective drawbacks. Ultimately, if you can qualify for EMI this might be the better option, which is evident by the amount each employee can invest but also other advantages we will look at later. But equally CSOP can also provide a wonderful solution especially for those businesses which would like the advantages of share schemes, like staff retention and influx of cash, but equally don’t meet the qualifying requirements for EMI.
Taxation
A big difference in the two share schemes is the ability to grant a discount, in the situation of EMI there is an ability to grant a discount, though this is rarely executed due to the higher income tax and NICs complications. Meanwhile in CSOP there is not – it must not be manifestly less than the market value which is something that will need to be agreed with HMRC. As a result, there are no income tax or NICs implications for a CSOP.
BADR is also available in the case of CSOP, like EMI, however in the case of CSOP this must meet the normal conditions of BADR. Being a personal trading company (See TCGA 1992 s169S (3)), must meet the lifetime allowance conditions (See TCGA 1992 s169N(4)) and held for the relevant 2 year period prior to the disposal (See TCGA 11992 s169I (3)). Unlike EMI which has very few requirements.
In addition there is a minimum holding period for CSOP – this means that employees must exercise their option between 3 and 10 years of the date of grant, if they were to exercise outside those years then they would lose the tax advantages and they would face an employment income tax charge at their marginal rate of income tax (See ITEPA 2003 s524). This would also make the asset subject to NICs as it would become a readily convertible asset.
For further guidance on CSOPs, see the Croner-i Direct Tax Reporter at 465-000 and HMRC’s guidance at ETASSUM40000.
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