In HMRC v NCL Investments Limited, Smith & Williamson Corporate Services Limited  v HMRC [2019] UKUTT0111 the Upper Tribunal confirmed that the grant of share options by an employee benefit trust was deductible as a trading expenses under IFRS2.

  • In accounting periods ended 30 April 2010, 30 April 2011 and 30 April 2012, the appellants granted share options to their employees, who were provided to other members of the group.
  • Staff costs were recharged on a “cost plus” basis around the group.
  • An EBT was used to hold shares in the company that would be used to satisfy the options.
  • IFRS2 required that an expense debit was shown in the appellants’ accounts in respect of the share schemes, even though the costs were recharged to other group companies.

HMRC denied tax relief in the accounts and the appellants appealed to the First Tier tribunal (FTT). The questions for consideration were:

  1. The debit “incurred” wholly and exclusively for the purposes of the appellants’ trade?
  2. Is the debit under International Financial Reporting Standard 2 (IFRS2) capital?
  3. Does CTA 2009 s1038 block a deduction? S1038 blocks deductions for costs directly relating to the provision of shares.
  4. Does CTA 2009 s1290 block a deduction? S1290 only permits a deduction for an “employee benefit arrangement” once the benefits are actually provided to (specific) employees.

The FTT decided that the debt was incurred wholly and exclusively for the trade as a revenue deduction and s1038 did not block the deduction as no shares were actually acquired and s1290 did not block the deduction as options were not held “under” an employee benefit scheme.

HMRC appealed to the UT on all grounds and claimed that the debit was not an actual expense.

The UT dismissed that argument on the basis that taxable profit was determined by Generally Accepted Accounting Practice (GAAP) and and agreed with all the FTT’s reasoning, finding that it had no need to consider s1038 for the same reason and that s 1290 does not establish a general principle that a company is denied a corporation tax deduction whenever it makes outright payments to employees that are not subject to tax in the employees’ hands.

UPDATE: HMRC appealed to the Court of Appeal also allowed the deduction, agreeing with the lower courts. HMRC were granted leave to appeal to the Supreme Court who also dismissed their case.

Useful guides

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Case decisions and write-ups

HMRC v NCL Investments Limited, Smith & Williamson Corporate Services Limited  v HMRC [2019] UKUTT

NCL Investments Limited, Smith & Williamson Corporate Services Limited  v HMRC [2017] TC05949