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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

Schedule 4 Company Share Option Plan (CSOP): Requirements relating to options: Date for which MV determined

Paragraph 22(2) gives HMRC discretion, for the purpose of fixing the option acquisition price, to agree to the market value of the shares being determined on a date earlier than the date the options are obtained. The legislation requires an agreement with an officer of HM Revenue & Customs to be in writing.

When setting up a Schedule 4 CSOP scheme which it is intended will contain scope for options to be granted based on the market value of the shares on a date earlier than the day preceding the date of grant, scheme organisers before seeking written agreement from HMRC, should adhere to the guidelines below: -

The following are the broad principles underlying HMRC use, in practice, of its discretion to allow market value to be determined at “an earlier time or times”:

  1. Averaging - averaging values of listed shares over consecutive dealing days is acceptable. In some cases deals done on one particular day may not provide a true reflection of the value of certain listed shares at that time. Averaging over three consecutive dealing days is the most common period, however up to five days can be accepted.
  2. Unilateral grants - where a scheme operates on the basis of unilateral grants (i.e. there is no administrative process of inviting potential participants to apply for options) there is no reason for the valuation date or dates to be taken earlier than the dealing day preceding the date of grant or, for listed shares, averaged over consecutive dealing days ending with that dealing day.
  3. Invitation and application - if a scheme operates by invitation and application, and the company wishes to be able to advise the actual option acquisition price when inviting applications, it is acceptable in principle to take the market value for the dealing day immediately preceding the date of invitation or averaged over consecutive dealing days ending on that day, provided the guidelines below are adhered to.

Where it is intended for the scheme rules to provide for an invitation and application procedure, scheme organisers should adhere to the following guidelines:

  • The period between the date of valuation and the date of grant should not be longer than is necessary for the company’s reasonable administrative needs. In practice 30 days is accepted as reasonable.
  • The date of valuation should not therefore be earlier than 30 days before the date of grant.
  • If averaging is being used to determine the value of listed shares, the earliest day used in the averaging must fall within the 30 day period.
  • There should be no expectation of significant movement in the value of the company’s shares between the valuation date and the date of grant, other than as a result of fluctuations in the market generally.
  • The same basis should be applied consistently to all grants of options.
  • It is not acceptable to await the date of grant and then choose a valuation date within the preceding 30 days (i.e. the date on which share values were lowest). The valuation date must be determined in advance so that potential applicants can be advised of the intended exercise price.

The “30 day rule” is normally most usefully expressed in cases involving invitations and applications by stating that options must be granted within 30 days following the valuation date or the earliest date where averaging is used rather than vice versa.

The valuation date must be a date on which options could have been granted. For example, companies will often have window periods following the announcement of yearly or half-yearly results, outside which options cannot be granted. A valuation date falling outside (i.e. before the commencement of) such a window period is not allowed.