In HMRC v NCL Investments Limited, Smith & Williamson Corporate Services Limited [2020] EWCA Civ 663, the Court of Appeal dismissed HMRC’s appeal finding that the costs of issuing share options through an Employee Benefit Trust (EBT) were deductible.

  • In the three years ended 30 April 2012, NCL and Smith & Williamson granted share options over shares in their group holding companies to employees who were made available to other group companies. The options were granted through EBTs which held the relevant shares.
  • 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 for the expense debits.

The Upper Tribunal had confirmed the decision by the FTT that the grant of the share options was deductible as a trading expense under IFRS2, agreeing that:

  • S.1038 CTA 2009 which blocks deductions for costs directly relating to the provision of shares did not apply.
  • The costs were incurred wholly and exclusively for the purposes of the companies’ trades.

The Court of Appeal agreed with the decision of the two lower courts.

  • S.1290 CTA 2009, which denies a Corporation Tax deduction for contributions to EBT’s until benefits are actually provided to (specific) employees, did not apply. The grant of the share options was not an employee benefit contribution when taken in context rather than applying the legislation literally as HMRC sought to do.
  • The debits were incurred wholly and exclusively for the companies’ trades, those trades being the provision of their employees' services to other group companies at a profit.
    • They were required by IFRS2 to reflect the companies’ use of the services provided by their employees, who were in part remunerated by the grant of the share options.
    • This was the case regardless of whether the companies were paying for the grant of the options or not. The fact that they were paying for the grant, albeit by way of a recharge, showed that the companies had a purpose in making the debits which went beyond complying with GAAP and was solely for the purpose of their trades.

UPDATE: Permission has been granted for HMRC to appeal to the Supreme Court. 

Useful guides on this topic

GAAP and FRS changes tracker
UK GAAP changed for accounting periods, beginning on or after 1 January 2015, with the introduction of FRS101 and FRS102.  

Employment-Related Securities & share schemes
This guide explains the tax consequences when a company gives shares to an employee or director and will assist you in designing share schemes.

External links

HMRC v NCL Investments Limited, Smith & Williamson Corporate Services Limited  [2020] EWCA Civ 663 

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