If you read nothing else, read this…

  • Employer support for company share option plans (Csops) is in decline.
  • Csops cost the government £45 million in tax relief in 2012/13.
  • The Finance Bill is expected to boost employers’ Csop take-up.

The Institute for Public Policy Research (IPPR) called for Csops to be abolished in its Sharing profits and power: Harnessing employee engagement to raise company performance report, published in August 2013, not least because of their cost to the UK economy.

The report showed that the 1,800 Csops, which are discretionary HM Revenue and Custom (HMRC)-approved share plans that enable employees to acquire shares in their employer, operating in the 2012/13 tax year cost the government £45 million in tax relief.

It stated: “HM Treasury will spend an estimated £615 million on tax relief for employee share schemes in 2012/13, of which one quarter is spent on schemes that do not have to be offered to all employees. The popularity of these discretionary schemes has risen over the past decade, skewing tax relief towards a small group of high earners.”

Threat of abolition

This is not the first time Csops have come under fire. The plans looked at risk of abolition following the Office of Tax Simplification’s (OTS) review of tax-approved share schemes, published in March 2012, which questioned the plans’ relevance.

But HMRC’s consultation on the Office of Tax Simplification’s Report on tax-advantaged employee share schemes, summary of responses, published in December 2012, confirmed that Csops would be retained.

Ironically, the threat of abolition seemed to renew employers’ enthusiasm for the schemes.

Graham Rowlands-Hempel, consultant at law firm Linklaters, says: “The overwhelming response from industry was that Csops help to recruit, retain and motivate employees, and that they allow employees to participate in a tax-advantaged plan without risk or upfront outlay for shares.

“Global companies reported that Csops enable greater consistency between share plans offered to UK and overseas employees.”

Loss of popularity

But HMRC statistics on Csops suggest that employers have fallen out of love with these share plans in recent years.

HMRC’s Employee share scheme statistics for 2011-12, published in June 2013, shows that the number of employees granted options under Csops fell from a peak of 415,000 in 2000-01 to just 25,000 in 2011-12.

But John Collison, head of employee share ownership at industry body Ifs Proshare, says the 2000-01 figure was boosted by a few very large all-employee schemes, including one at supermarket chain Asda. Nevertheless, there has been a big drop in the number of employers operating Csops, down from 4,270 in 2000-01 to 1,300 in 2011-12.

Volatile share markets have undoubtedly contributed to a general fall in popularity of share option schemes.

HMRC’s refusal to increase the £30,000 share value limit that employees are allowed to hold at any one time is another likely driving factor. This low limit has made the schemes a relatively unattractive executive remuneration tool for many organisations.

Valuable tool

But the Employee Stock Ownership Plan Centre believes Csops continue to be a valuable tool with which employers can reward employees, particularly part-time and low-paid staff.

Collison agrees that a Csop is suitable for all employees, adding that the IPPR’s suggestion that the plan is purely a directors’ benefit is misleading. “It really isn’t,” he says. “At least half of employers offer [share] options down to their middle management.”

This makes Csop’s £30,000 limit more relevant, he adds.

Linklaters’ Rowlands-Hempel says: “By their very nature, different employers use Csops differently: some extend the plans to junior management or even all employees, whereas others restrict their use to senior management and executives.”

Niall Murphy, tax specialist at Shoosmiths, says the detailed operational simplifications introduced for tax-approved share plans in this year’s Finance Act should encourage the use of the plans. These include the introduction of self-certification for Csops, which means employers will be able to self-certify their own share schemes, rather than having to rely on an HMRC-approved share plan administrator.

Rowlands-Hempel adds: “It is likely that self-certification will make plans, and in particular Csops, which are so flexible, more popular because it should be possible [for employers] to set up and operate them speedily and simply.”