Employee incentives: new opportunities for fintech companies

Upcoming changes to the tax-advantaged company share option plan (CSOP) are due to take effect on 6 April 2023.

While there is a clear benefit to the increase in the size of awards that can be made from £30,000 to £60,000, some companies (in particular those operating in the fintech sector) will be more interested in the removal of the current share class restrictions.

One advantage of removing the restrictions on the types of shares that can be awarded under a CSOP is that companies that are specifically excluded from offering enterprise management incentive (EMI) options may now be able to offer meaningful tax-advantaged incentives to their employees.

Fintech and EMI

Why are EMI plans not available to most fintech companies? One of the qualifying conditions for tax-advantaged EMI options is that the company must carry out a "qualifying trade".

The EMI legislation specifies that "banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities" are "excluded activities".

This has resulted in many companies operating in the fintech sector being unable to offer these highly beneficial incentives.

Fintech companies were often then left in a position where they would also be unable to offer CSOP options (as the class of share often did not satisfy the share class restrictions that currently applies).

This left many fintech companies turning to alternatives such as growth shares rather than traditional tax-advantaged options.

What is changing?

Following the changes that are due to come in on 6 April 2023, the shares under a CSOP option (for companies with more than one share class) will no longer need to be of a class that give employees control of the company or are majority owned by investors. The relaxation will mean that many fintech companies which were previously unable to offer tax-advantaged awards may now be able to grant CSOP options to their employees (provided they satisfy the other requirements of the CSOP legislation).

Moreover, the relaxation will allow companies to create a new class of growth share (or use pre-existing growth shares) and grant CSOP options over them. The typically lower market value of growth shares (which should be agreed with HMRC prior to the grant of CSOP options) and the higher £60,000 limit will allow meaningful CSOP awards to be made to employees.

Osborne Clarke comment

While fintech companies have often been left to seek alternatives to the traditional tax-advantaged plans, the upcoming changes offer such companies a clear opportunity to effectively incentivise their workforce.

The removal of the share class restriction requirements potentially allows more companies to grant CSOP options over their ordinary shares (including over growth shares).

Additionally, the increase of the individual limit from £30,000 to £60,000 means CSOPs offer a viable alternative to other share based incentives, where historically the low limit and share-class restrictions meant CSOPs have only been used to make relatively small awards to junior employees.

Companies that previously did not qualify for EMI or CSOP (or which had simply outgrown the EMI qualifying limits) may now wish to explore whether they qualify for CSOP under the amended legislation from 6 April 2023.

Please get in touch with your usual Osborne Clarke contact or one of the experts below if you have any queries about CSOP or would like to discuss further.