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HMRC internal manual

Business Income Manual

Specific deductions: employee share schemes: introduction

Many companies use employee share schemes as a way of attracting, rewarding and retaining staff. Some schemes are open to all employees. Others may only apply to key employees and directors. In some cases there may not be a formal scheme at all, just arrangements for individual employees, for example under the terms of a service agreement.

The shares provided to employees will usually be in their employing company or in a company which (on its own or in consortium with others) has control of the employing company, giving the employees a real stake in the business for which they work.

There are various types of schemes and arrangements through which employees acquire shares. The main variations which may affect the tax consequences for the employer relate to the following:

  • Which company sets up the scheme - the scheme may be set up by the employing company itself or, if it is a subsidiary, by its parent company for the benefit of employees of companies in its group (a ‘group scheme’).
  • The nature of the share incentives given to the employees - these may be share options (which give the employees a right to acquire shares at a set price at some time or times in the future) or other kinds of share awards, see BIM44005.
  • The source of the shares acquired by the employees - the shares may either be new shares issued by the company or existing shares bought in the market or privately from another shareholder.
  • Whether a trust is used - an employee share ownership trust may be set up to hold the shares before ownership of them is transferred to employees, or the company may just issue new shares direct to employees.

Phantom share schemes

Companies may also set up phantom share option schemes. Under phantom schemes employees receive payments in cash and do not acquire shares. The amount received in cash is usually equal to the increase in the value of a specified number of shares over a specified period of time.