This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

Company Share Option Plan (CSOP): Taxation: Withholding

Consequential to PAYE potentially applying to Schedule 4 CSOP options, since 9/04/2003 scheme rules have been regarded as qualifying for tax advantages if they contained provisions to enable employing companies to account for PAYE liabilities upon exercise of a Schedule 4 CSOP option. The following is considered to be an acceptable rule for inclusion in a Schedule 4 CSOP scheme:

“If the company is obliged in any jurisdiction to account for tax and national insurance contributions for which the Option holder is liable by virtue of the exercise of the Option and the company has not received from the Option holder the necessary amount, then the company shall be entitled to discharge such liability by selling sufficient Shares in respect of which the Option has been validly exercised”.

The particular points to note here are:

  • The option holder should have the opportunity to meet any liability from his own resources (either by salary deduction or payment to the company) before any withholding of shares,
  • in this respect, the rule must refer to selling “sufficient” shares and not all shares,
  • The withholding of “sufficient” shares can only occur after the valid exercise of the option with the remaining shares being transferred or allotted to the option holder, reducing the number of shares prior to exercise is not acceptable,
  • Withholding of shares under these circumstances may be a condition of exercise but not a condition of grant of an option or allotment of shares,
  • The provision must be accepted by the participant, usually by indicating acceptance within the ancillary documents,
  • The liability may include secondary NIC if there is a valid election or agreement in place or these will be in place prior to the exercise of the option,
  • Entering into a NIC election or agreement may be a condition of exercise but not the grant of an option (see ETASSUM48270).