Fintech companies looking to incentivize their employees may want to consider tax-deductible stock option schemes for the company
Upcoming changes to the tax-related company share option plan (CSOP) will come into force on 6 April 2023.
While there is a clear benefit to the increase in the size of awards that can be made from £30,000 to £60,000, some companies (particularly those operating in the fintech sector) will be more interested in removing the current share class restrictions .
One benefit of removing the restrictions on the types of shares that can be awarded under a CSOP is that companies that are specifically excluded from offering enterprise management incentive (EMI) options can now offer meaningful tax-advantaged incentives to their employees.
Fintech and EMI
Why are EMI plans not available for most fintech companies? One of the qualifying conditions for tax distributed EMI options is that the company must carry out a ‘qualifying trade’.
EMI legislation specifies that “banking, insurance, money lending, debt factoring, lease financing or other financial activities“is”excluded activities“.
This has meant that many companies operating in the fintech sector have not been able to offer these highly beneficial incentives.
Fintech companies were often left in a position where they would also not be able to offer CSOP options (as the share class often did not satisfy the share class restrictions currently in place).
This led many fintech companies to turn to alternatives such as growth stocks rather than traditional tax-advantaged options.
What is changing?
Following the changes due to come into effect on 6 April 2023, the shares under a CSOP option (for companies with more than one share class) will no longer need to be of a class that gives employees control over the company or is majority owned by investors. The relaxation will mean that many fintech companies that were previously unable to offer tax-advantaged awards can now grant CSOP options to their employees (provided they satisfy the other requirements of the CSOP legislation).
Furthermore, the relaxation will allow companies to create a new class of growth shares (or use existing growth shares) and grant CSOP options over them. The typically lower market value of growth shares (which should be agreed with HMRC before granting CSOP options) and the higher £60,000 limit will allow for meaningful CSOP awards to employees.
Osborne Clarke comments
While fintech companies have often been left to seek alternatives to the traditional tax-advantaged plans, the upcoming changes give such companies a clear opportunity to effectively stimulate their workforce.
The removal of share class restriction requirements potentially allows more companies to grant CSOP options over their ordinary shares (including excess growth shares).
In addition, the increase of the individual limit from £30,000 to £60,000 means that CSOPs offer a viable alternative to other share-based incentives, where historically the low limit and share class restrictions have meant that CSOPs have only been used to provide relatively small bonuses for junior employees. .
Companies that were previously ineligible for EMI or CSOP (or had simply outgrown the EMI eligibility limits) may now wish to investigate whether they qualify for CSOP under the amended legislation from 6 April 2023.
