On 14 June 2017, the First-tier Tribunal held2 that accounting debits made in accordance with IFRS2 on the grant of employee share options were deductible from the employer company’s corporation tax computation. The facts of the case pre-date changes made to the Corporation Tax Act 2009 by Finance Act 2013.
The appellant (subsidiary) companies paid amounts to their parent company whenever the parent granted share options to employees of the subsidiaries. The subsidiaries claimed that these payments were deductible for corporation tax purposes, but HMRC disagreed.
Under IFRS2 and in these circumstances, on the grant of an employee share option the employer company must debit the fair value of the option in its accounts. It is the employer company that must so account, even if the shares under option are shares in another group company (for example, as in this case, in the parent company of the employer).
In this case the appellant companies accounted under IFRS, and debited amounts on grant of employee share options by the parent in accordance with IFRS. Although this was common ground, HMRC refused a corporation tax deduction as (on alternative grounds):
• the expenses were not, according to HMRC, incurred “wholly and exclusively” for trading purposes
• the expenses were, according to HMRC, capital rather than revenue in nature
• section 1038 of CTA 2009 (as in force at the relevant time) prevented a corporation tax deduction in this case.
The Tribunal had little difficulty in dismissing HMRC’s arguments on points 1 and 2. For tax deductibility purposes, the test of being “incurred” was met when a debit was reflected in a company’s accounts in accordance with applicable accounting standards. The debits were, in the Tribunal’s view, recurring costs that were revenue in nature.
On point 3 the Tribunal also dismissed HMRC’s argument, favouring the appellants’ view that whilst Part 12 of CTA 2009 (as in force at the relevant time) was concerned with tax relief on an acquisition of shares (pursuant to options) the present IFRS debits related to the grant of options. Section 1038, which denied a deduction when relief is “available” under Part 12, therefore was not triggered.
It should be noted that Part 12 of CTA 2009 was amended by Finance Act 2013 for accounting periods ending on or after 20 March 2013. The Government’s view appears to be that the FA 2013 changes served only to “clarify and confirm” the correct position, namely that (i) no corporation tax deduction is available in respect of employee share options that are not exercised, and (ii) an employer company should not be able to benefit from both a specific statutory deduction under Part 12 of CTA 2009 and a deduction for accounting expenses on grant of an option. The decision in NCL Investments Limited clearly casts doubt as to whether the FA 2013 changes merely clarified the correct tax treatment.
It seems likely that HMRC will appeal the First-tier Tribunal’s decision.
The decision can be viewed here.