Five CSOP failures that can derail a transaction

HMRC approved doesn’t mean self-policing

A Company Share Option Plan (CSOP) is tax-advantaged, not self-enforcing. As more private companies approach sale, investment or refinancing, pre-deal healthchecks are exposing how quickly qualifying status can be lost and how fast a capital-gains outcome can flip into PAYE/NIC at exercise. 

Governance and deal expectations have risen. CSOPs now demand the same rigour you’d apply to EMI options.

1. ERS notification - register on grant

A CSOP only acquires tax-advantaged status once it is registered on HMRCs ERS portal. If a qualifying event (such as an exit or sale) occurs before registration, all options are treated as non-qualifying, regardless of whether you are still within the 6 July filing window. Registration must be completed before any event that would trigger option exercise, not just before the annual deadline. Failure to do so potentially exposes the entire gain to PAYE/NIC.

Action: Register the plan as soon as possible after grant and no later than 6 July in the following tax year. Note the USRN and save screenshots of the confirmation pages. Upload these to the data room - which these days is a standard diligence request.

2. Valuation - HMRC agreement is a shield, not a guarantee

Obtaining HMRC agreement to the unrestricted market value (UMV) at grant is a critical step, but it does not guarantee immunity from challenge. If there is a material increase in share value soon after grant, or if a transaction is imminent, HMRC may revisit the valuation and potentially withdraw tax-advantaged status. The risk is heightened if the valuation methodology or supporting documentation is incomplete.

Action:

• Document your valuation methodology and assumptions in full.
• Keep the full correspondence trail.
• Quantify any possible PAYE/NIC exposure, including potential Reg. 72F offsets (if CGT has been paid) and s222 ITEPA gross-up risks (if PAYE/NIC can’t be recovered from participants).
• Consider specialist tax insurance for material exposure.

3. Early exercise on a company event - lock down the tax mechanics

Under the CSOP code, tax relief for early exercise (within three years of grant) is only available if all the statutory conditions are met, namely:

• The exercise is triggered by a defined company event, specifically, a “general offer” to acquire the whole issued share capital (i.e., a takeover or sale of all shares).
• The options are exercised within 20 days of the event.
• The participant receives cash consideration for the shares acquired. Any reinvestment should ideally be structured as a separate, subsequent transaction.

At the time of grant, there must be no arrangements in place or under consideration for such a general offer. HMRC interprets “arrangements” broadly, including informal understandings, heads of terms or letters of intent. Robust documentation (such as board minutes and transaction records) is essential to evidence compliance and protect tax-advantaged status.

Failure to meet the above requirements risks reclassifying capital efficient CSOP options as non-qualifying options with a PAYE/NIC liability.

Action: Your deal documentation should clearly show:

1. Option exercise
2. Acquisition of shares
3. Sale for cash (deferred consideration can count)
4. Any reinvestment as a distinct, subsequent step

4. Leavers and discretion - where flexibility can undermine qualification

While boards may wish to exercise discretion to reward good leavers, CSOP rules are strict: options retained outside statutory categories (e.g., injury, disability, redundancy, retirement etc.) become non-qualifying and any gain on exercise is subject to PAYE/NIC. The mere inclusion of discretion clauses in plan rules does not disqualify the plan, but actual use of discretion must be assessed on a case-by-case basis. 

It is understandable that Boards want the flexibility to reward good leavers. But under the CSOP code, discretionary retention, i.e. allowing someone to keep options outside the CSOP statutory leaver categories, typically renders those options non-qualifying, triggering PAYE/NIC on exercise.

Even well-intentioned flexibility can create significant tax exposure. Aligning plan rules with the CSOP code and preparing for non-qualifying cases in advance helps avoid surprises at exercise or during diligence.

Action:

• Draft discretion clauses carefully so they can’t override statutory rights.
• Hard-wire leaver outcomes to the permitted categories (e.g. injury, disability, redundancy, retirement etc.).
• Pre-configure payroll to handle PAYE/NIC for non-qualifying or discretionary cases.

5. The CSOP defence file - your diligence shield

Increasingly, both buyers and HMRC expect a curated, comprehensive “CSOP defence file” that evidences strict adherence to the CSOP code and supports transaction readiness. This file should include:

• HMRC valuation submission, queries and agreement.
• Board minutes confirming no “arrangements under consideration” at grant, plus sale timeline.
• ERS plan registration and grant uploads (with USRN).
• Executed option certificates, grant logs and leaver determinations.
• Payroll records for non-qualifying or discretionary exercises.

A clean defence file is not just good hygiene, it is a strategic asset that underwrites the tax treatment, accelerates diligence and avoids last-minute surprises.

Where this leaves you before a deal

CSOPs remain a powerful tool, but only when operated with investor-grade discipline. If you’re within striking distance of a transaction, treat the plan like a critical-path workstream: confirm ERS status, lock down cash-only exercise mechanics, constrain discretion around leavers and build and maintain a defence file that stands up in diligence. 

Get this right, and you preserve capital gains treatment, protect employee trust and eliminate avoidable friction at completion.

At Burges Salmon, we help clients run CSOPs that stand up to scrutiny. We combine deep technical expertise with practical, deal-tested insight to ensure your plans are compliant, defensible and aligned with your commercial goals. Whether you're preparing for a transaction or simply raising your governance game, we work with you to protect tax outcomes, reduce risk and deliver value to your team.