• These are tax approved plans for employees selected at the employer’s discretion to receive share options (that is, there is no requirement to include all eligible employees)
• The company can operate an approved CSOP only after HM Revenue & Customs (HMRC) has approved it. An application for approval needs to be made in writing by the company setting up the scheme. In the case of a group scheme, the application must be made by the controlling company
• The employees and directors taking part should be resident and ordinarily resident in the UK for tax purposes and must normally be employed at the time of grant and exercise
• An option can be granted by the employer to enable employees/directors to buy the company's shares with a market value at the date of grant of up to a total of £30,000
• No income tax or NIC is chargeable when an option is granted
• Provided no option is exercised within three years of the date of the grant, there will be no income tax or NIC liability on exercise of the option
• If the company is close, participation in an approved CSOP scheme is not open to anyone who owns more than 25% of the ordinary share capital of the company
• The shares used must form part of the ordinary share capital of the employer and satisfy various conditions
• The company's articles of association must meet certain conditions for approval to be granted to the scheme
• PAYE and NIC must normally be accounted for in relation to exercises of options which do not qualify for tax relief or where an option is given up in return for money or something else of value
• When options are exercised under an approved CSOP scheme, the employer normally obtains a corporation tax deduction for the amount of the employee’s gain (even though the employee will not normally be liable to income tax on that gain). This is subject to a clawback rule that restricts relief in relation to particular shares if the employer has previously enjoyed a corporation tax deduction in respect of expenses incurred in relation to those shares
• Options exercised within six months of the cessation of an option holder's employment for injury, disability, retirement, redundancy, or because of a takeover, are not taxable or liable to NIC regardless of the period between the grant and exercise of the option
• On disposal of shares acquired through the exercise of a CSOP option, a liability to capital gains tax may arise. The base cost for capital gains tax purposes is normally the price paid for the shares. If any income tax liability arose on exercise, the base cost includes the amount subjected to income tax
• Employees wishing to obtain the maximum tax benefit from a CSOP option must generally wait for the first three years after the grant before exercising, may then upon exercise sell the shares immediately, funding the exercise price from the sale proceeds, leaving the balance to be taxed at an effective rate of 28% or less. In practice, for many, the gains will be covered by the capital gains tax annual exemption (£10,600 for 2011/12)
• For unlisted companies, a valuation for the shares must be agreed with HMRC before any options can be granted, as it is a requirement of tax law that the exercise price cannot be manifestly less than market value. If this is not done, the options may be treated as unapproved
• For fully listed companies, and for AIM and other unlisted companies the ‘fair value' (as defined especially for this purpose) of options granted must be shown as a deduction in the profit and loss account. The calculation and timing of the accounting deductions will differ from the value of the shares and from the amount of the statutory corporation tax deduction referred to above.

Careful attention must be paid to the risk factors set out below.

• The tax legislation, rates and reliefs referred to herein are those for 2011/12. Tax rules change and the value of a relief from taxation depends on the circumstances of the taxpayer
• The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and changes in tax legislation and you may not get back the amount originally invested
• If there is no recognised market for the shares involved it may be difficult to deal in the investment or to obtain reliable information about the value of the investment or the risks that may be involved.

For further information on share schemes, please visit www.bakertilly.co.uk/ecg