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Taking your share: CT relief for employee shares

The following is a short piece we recently wrote for the UK200 Tax Panel newsletter Talking Tax. We thought it deserved an (even) wider audience: so here it is. For more, please contact david.whiscombe@bkltax.co.uk, direct line 0208 922 9104

Employees can acquire shares in their employer's company either as an award or by exercising options. When they do most practitioners realise there is an employment tax issue. Experience however suggests the corresponding deduction against corporation tax profits is often missed, leading in some cases to a hefty overpayment of tax.

This is a schoolboy error - so pay attention class!

Turn your textbooks to S1001 CTA 2009 and watch the board while I run through it...

When an employee acquires shares:-

As an issue of shares by the company
As an award of shares by the company or another person
By exercising a share option including an EMI share option

The company will be entitled to a deduction based on the difference between the market value of the shares when they are acquired, less the amount paid for them. (S1010).

This is different from the adjustment required under accountancy principles which is made when an option is granted rather than when it is exercised. It can also apply when shares are gifted by a current shareholder to the employee, which of course is not reflected in the company's accounts at all. This is the problem, there is little in the accounting treatment to remind you to claim the tax deduction, it is merely an entry in the tax computation.

There are a number of requirements in the small print but essentially the shares have to be:-

fully paid up and not redeemable
in the employer company or (if the employer is a subsidiary) in the employer's parent company
subject to income tax in the hands of the employee (or exempted in the case of EMI or other approved schemes).

Two examples:-

Bill is granted EMI options over 100 shares in Flowerpot Enterprises Ltd. At the time of grant the shares are worth £10 each. Five years later he exercises the options and pays £1,000 for them. At that time the shares are worth £50 each - £5,000 in total. Bill pays no income tax under the EMI rules but the company is still entitled to a deduction of £4,000 (£5,000 - £1,000)
Jack is the major shareholder in Beyond the Pail Ltd. He wants to bring Jill, his operations director, onboard as a shareholder and gifts her shares equivalent to 10% of the company. At the time the shares are worth £50,000. Jill receives them by reason of her employment and pays income tax on £50,000. The company is entitled to a deduction of £50,000 when the gift is made.

Bear in mind that this only applies to shares received by reason of employment - if Jill had been married to Jack, the shares would be received as a result of their personal relationship and no deduction would be available.

OK class that's it for today - homework is to process three claims for next time!