Tax deductibility of share scheme costs

Thu 13 Jul 2017

Background to the historical tax treatment of share scheme costs

Prior to 20 March 2013 CTA09 s.1038 excluded from tax deductibility any expenses directly related to the provision of shares, where there was a deduction under CTA 2009 part 12 for employee share acquisitions. The language of s1038 was quite specific and did not refer to share options. Deductions under CTA 2009 part 12 could, however, be obtained for events chargeable under part 7 of ITEPA 2003 on share options (see chapter 3 of part 12 CTA 2009).

Link with accounting

This raised the question as to whether accounting deductions for share based payments arising from the provision of grant of a share option, were deductible for corporation tax purposes. Some companies took the accounting deduction as tax deductible.

First tier Tribunal case

The First tier Tribunal (FTT) has considered the issues in a case involving Smith & Williamson Corporate Services Limited and NCL Investments Limited, and rejected HMRC’s arguments in respect of deductions taken in the three accounting years ended 30 April 2012.
The FTT considered the share based payment deduction was treated as an expense brought into account for the purpose of a trade under CTA 2009 s.48 and that it was incurred wholly and exclusively for the purposes of the trade.

Other issues and implications

There was an examination of the meaning of “incurred” and in the FTT’s view incurred could mean accounting deductions. This may have implications for HMRC’s view of the tax treatment of accounting deductions for deemed interest on interest free loans for income tax purposes.

Share options

The FTT agreed with the taxpayers that the restriction in CTA 2009 s.1038 prior to the Finance Act 2013 changes, was incapable of applying to expenses associated with share options.

The share options were granted by an employee benefit trust (EBT) and satisfied by shares held within that EBT. HMRC sought to argue the options were an employee benefit contribution, and that CTA 2009 s.1290 prevented a deduction unless the benefits were paid out in the accounting period or within 9 months of the period end. After considering the definition of the making of an employee benefit contribution, the FTT considered that if the property was the options, this was a contract between the EBT and the employee, and not property held within an employee benefit scheme. In the case of the property being the shares held by the EBT to satisfy the options, the FTT view was that the shares were held to honour the contractual obligation under the option, rather than for any employee benefit scheme. The conclusion was thus that CTA 2009 s.1290 could not prevent a deduction.

Amendments to the legislation

FA 2013 replaced CTA 2009 s.1038 with a new version of that provision and new s.1038A for accounting periods ending on or after 20 March 2013, this time taking into account share option scheme costs. Amounts considered by the FTT to be deductible for companies at the time of the case considered, are therefore no longer tax deductible.

Key point

Those companies with outstanding enquiries into tax deductions for accounting entries for share based payments may like to review their position in the light of this decision.