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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

HM Revenue & Customs
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Schedule 4 Company Share Option Plan (CSOP): General requirements: Cash features

A right to shares or cash?

A feature of a scheme which provides scope for cash to be paid to participants instead of the shares which they have a right to acquire is not acceptable. A common feature of foreign schemes, particularly US schemes, is to allow the company to substitute cash for shares on exercise, or alternatively allow the option holder to opt for cash rather than shares. If the scheme rules provide for such an alternative, the scheme will clearly contain an unacceptable feature and this must be removed or dis-applied; schemes containing such features will not qualify for tax advantages. If the company has a right to substitute cash for shares then this would no longer constitute a securities option.

Cashless exercise

A “cashless exercise” procedure where shares are sold immediately after exercise is not a cash alternative and is therefore normally acceptable. The important point to note here is that the participant must acquire the shares subject to the option upon exercise of that option. It is NOT acceptable if shares are sold prior to exercise (or options given up) as the participant would in effect be receiving cash for giving up all or part of his option.

Whether or not the offer of cash is part of the scheme?

More usually the scheme rules are silent on the scope for making cash payments and the question arises in the context of offers of cash made to scheme participants and referred to in other documents being sent to the scheme participant by the scheme operator. The relevant questions are:

  • whether the offer of cash is considered to be part of the “scheme”, and
  • if so, whether it fails to meet the requirements of paragraph 5.

Whether an offer of cash is part of the scheme depends on by whom and to whom it is made:

  • an offer of cash to current option-holders, made by the grantor of the option or by any of the companies which participate in the scheme (for example as compensation for not being able to adjust options to the desired extent following a company reorganisation), is a feature of the scheme and unacceptable for the purposes of paragraph 5,
  • an offer of cash to current option-holders which comes from outside the scheme (for example, offers of cash made by purchaser companies in a takeover bid in return for the cancellation of options) is not a feature of the Schedule 4 CSOP scheme for the purposes of paragraph 5 (see below),
  • an offer of cash after the options have been exercised (i.e. to ex-participants - perhaps as some form of compensation) is not a feature of the scheme, whoever it is made by,
  • an offer of cash to enable employees to exercise their options is a feature of the scheme, but is no longer likely to be an acceptable feature following the changes arising in FA2014 (paragraph 5).

There is no objection to general documents issued to scheme participants by companies operating plans making reference to cash cancellation offers which have been made from outside the scheme. For example, it is a requirement of the City Code on Takeovers and Mergers that target companies in a takeover bid must obtain competent independent advice on the offers or proposals made by the bidder, and make the advice, and the recommendations of the Board of the target company, known to the shareholders and option-holders.

Cash payment to facilitate exercise

Arrangements can be made outside of the Schedule 4 CSOP scheme whereby employers make cash payments to employees which they can then use to exercise their share options. But it should be made clear that the cash received will be emoluments of the employment, chargeable to income tax/NIC under PAYE in the usual way.