Section 39: Approved Csop Schemes: Eligible Shares
Summary
1.Section 39 counters avoidance arrangements which are being used to circumvent the financial limit in the Company Share Option Plan (CSOP) legislation. The avoidance involves arrangements being used which fall under the general description of “geared growth” and which can be used to deliver additional reward to individuals, beyond that intended under the CSOP legislation.
2.Section 39 amends paragraph 17 of Schedule 4 to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) so that share options can no longer be granted under CSOP over shares in an unlisted company which is under the control of a listed company.
3.This change has effect from 24 March 2010, so that options granted on or after that date will no longer qualify for exemption from the charge to income tax and National Insurance contributions in respect of the exercise of the option.
4.Options over shares in an unlisted company which is under the control of a listed company which were granted before 24 March 2010 in accordance with the provisions of an approved CSOP scheme will continue to qualify for the exemption from the charge to income tax in respect of the exercise of the option, provided the other requirements of the CSOP code are met.
5.Where the rules of an approved CSOP scheme provide that a company may grant options over shares in an unlisted company which is under the control of a listed company, a six month transitional period will be allowed for the scheme rules to be amended in order to meet these changes to the legislation. However, any options granted over shares in an unlisted company which is under the control of a listed company during that six month transitional period will not qualify for the exemption from the charge to income tax in respect of the exercise of the option.
Details of the Section
6.Subsection (1) provides for paragraph 17(1)(c) of Schedule 4 to ITEPA to be omitted.
7.Subsection (2) provides for consequential changes to sub-paragraph (1) of paragraph 17, and the omission of sub-paragraph (2) (definition of a “listed company”) from paragraph 17. It also provides for the omission of paragraph 20(3)(c), which defines “open market shares” where the shares in question are not listed on a recognised stock exchange and are under the control of a “listed company” (as that term is defined in the legislation).
8.Subsection (3) provides that the changes made by this section will come into force on 24 September 2010, after a six month transitional period from 24 March 2010 and will have effect in relation to options granted on or after 24 September 2010.
9.Subsection (4) provides that options granted to individuals in accordance with the provisions of an approved CSOP scheme during the transitional period from 24 March 2010 to 23 September 2010 will be treated for the purposes of the CSOP code as not granted in accordance with the provisions of an approved CSOP scheme, if the shares which may be acquired by the exercise of the option are those of a company which is under the control of a listed company, unless the shares in question are in a company which is itself listed on a recognised stock exchange.
10.Subsection (5) provides that any alteration made to a CSOP scheme during the transitional period so as to meet the requirements of the amended paragraph 17 will be treated as an alteration to a key feature of the CSOP scheme for the purposes of paragraph 30 of Schedule 4 to ITEPA (withdrawal of approval).
11.Subsection (6) provides that if the amended paragraph 17 requirement is not met at the end of the transitional period, the requirement is to be treated for the purposes of paragraph 30(2)(a) of Schedule 4 to ITEPA (disqualifying events) as ceasing to be met immediately after that time.
12.Subsection (7) provides that if approval for a scheme is withdrawn under Part 7 of Schedule 4 to ITEPA as a result of subsection (6) above, the withdrawal will be from the time determined in accordance with paragraph 30(1) of Schedule 4 to ITEPA and will apply to options granted on or after 24 September 2010.
13.Subsection (8) provides that references to options having been granted in subsections (3) to (7) include new share options granted under the terms of a provision included in a scheme under paragraph 26 of Schedule 4 to ITEPA (exchange of shares on company reorganisation). However, paragraph 27(5) of Schedule 4 (new share options treated as granted at the same time as old share options) does not apply for the purposes of subsections (3) to (7).
14.Subsection (9) provides definitions of terms used in this section.
Background Note
15.CSOP is a discretionary share scheme, which allows companies to award share options to selected employees and directors. The granting of options allows eligible employees or directors to buy the company’s shares from a date in the future at a price set on the date of grant.
16.Under CSOP, companies can award employees or directors options over shares with a market value of up to £30,000 at the time of grant. Provided the requirements of the scheme are met, there will be no charge to income tax or National Insurance contributions on the exercise of the CSOP option. However, capital gains tax may be due on a subsequent disposal of the shares.
17.Until 1980, shares in unlisted companies could not be used in approved share option schemes. However, this rule was changed to allow shares in unlisted subsidiaries of listed companies to be used in approved schemes, provided the parent company was listed on a recognised stock exchange and was not a close company (or would not be a close company if it were UK resident).
18.However, avoidance arrangements have been used recently in which CSOP options are granted over shares which are subject to “geared growth” arrangements. Under these arrangements, the shares which are subject to the option have no rights, or limited rights, over the value of the company at the time the options are granted, but have rights over all subsequent growth from that time onwards. This allows a large number of low value shares to be issued within the £30,000 limit, with potentially high growth in the future, which can thereby circumvent that limit.
19.These avoidance arrangements involve share options granted over shares in unlisted companies which are under the control of a listed company. The rules of CSOP are therefore being amended to prevent the use of options over shares in an unlisted company which is under the control of a listed company, to ensure that the effectiveness of the £30,000 limit is not weakened.
20.Where the rules of an approved CSOP scheme provide that a company may grant options over shares in an unlisted company which is under the control of a listed company, such a scheme will no longer meet the requirements of Schedule 4 to ITEPA. The new legislation provides for a transitional period of six months during which the rules of such a scheme may be amended to meet the newly amended requirements of paragraph 17. If schemes are not amended by the end of that period, HM Revenue & Customs may withdraw approval of the scheme.
21.The changes will take effect for all options granted on or after 24 March 2010, with the result that no options granted during the six month transitional period over shares in an unlisted company under the control of a listed company will qualify for the exemption from the charge to income tax in respect of the exercise of the option.
22.Options granted before 24 March 2010 are not affected by this change, and will continue to qualify for the exemption in respect of the exercise of the option, provided the other requirements of the CSOP code are met.