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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): Requirements relating to options: Performance conditions

It may be accepted in principle that the exercise of a share option can be made subject to the attainment of targets by the option-holder or the company. The most commonly seen targets in Schedule 4 CSOP schemes are those relating to the attainment by the company of a targeted growth in pre-tax profits, turnover or earnings-per-share (EPS). Targets that are specific to a particular individual or to the division for which he or she works may also be acceptable provided these are fair and objective measures for the individual or the division for which he or she works.

On the basis of the decision in CIR v Burton Group plc (ETASSUM47250) schemes must only contain scope for setting additional conditions which are:

  • objective conditions based on business results or other objective criteria,
  • either specified in the terms of the option when granted, or with objective machinery in place at that time governing when and which additional conditions can be set, and
  • only capable of subsequent variation or waiver:


  • in specified circumstances and to a specified extent, or
  • in accordance with objective machinery in place when the option is granted, which covers when and to what extent conditions can be amended.

Companies may not wish to commit themselves, when their scheme rules are drafted, to the precise “additional conditions” to which options to be granted under the scheme will be subject, and may prefer to retain for their directors some flexibility in this area. Schemes which give directors absolute discretion on whether to grant options which are subject to performance conditions can still qualify for tax advantages. But, in line with the decision in CIR v Burton Group plc (ETASSUM47250), the scheme rules should suitably limit the directors’ discretion on precisely which additional conditions they may impose, if they decide to do so.

The “limiting” criteria might, as in the Burton scheme, take the form that performance targets which can be set must be reasonably considered by the directors to be a fair measure of the performance of the holder of the relevant job for the financial year. This has the effect of hedging in the directors’ discretion by the objective limitations of fairness and reasonableness in specified circumstances. Other limitations may be acceptable, but it must be clear from them that the targets must be objective.

Performance targets - when conditions may be set

For those options which may be subject to performance targets, scheme rules must make it clear when such additional conditions can be imposed. Most schemes with performance conditions provide for them to be set at the date of grant (perhaps set out in the invitation letter, if there is to be one, or in the option certificate). 

For schemes which wish to have scope, as in the Burton Group scheme, to set additional conditions after the option has been granted, there must be some form of objective machinery in place which limits when, as well as which, additional conditions can be set and this must be stated at the time the option is granted (paragraph 21A(2)(c)).