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HMRC internal manual

Business Income Manual

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Specific deductions: employee share schemes: providing shares to employees: qualifying shares: the relevant business requirements

S1007(2), S1015(2) Corporation Tax Act 2009

The following business requirements must be met for a statutory deduction in respect of qualifying shares to be available:

  • the business for the purposes of which the share options were granted or the share awards were made must be carried on by the employing company (or a successor company), and
  • the employing company (or a successor company) must be chargeable to corporation tax on its profits from that business or it would be so chargeable but for the exemption for foreign permanent establishments under S18A Corporation Tax Act 2009.

In practice there are very few circumstances in which these requirements will not be satisfied. It will be very unlikely that the company, by reason of employment with which the employee was given a share award, is not carrying on the business for the purposes of which the share award was made.

Employing company

The employing company is the company by reason of employment with which the employee was granted the share options or awarded the shares.

Successor company

A successor company is a company:

  • in the same group as the employing company, and
  • to which the relevant business (or substantially all of it) is transferred between the date of the grant of a share option and the date the shares are acquired under the option. See BIM44300.

Employees employed by service companies

If an employee is employed by a service company which provides services to other companies, and is given a share award by reason of employment with the service company, the business for the purposes of which the share award was made will be the service-providing business carried on by the service company, not any other businesses carried on by other companies to which the service company may provide its employees’ services. An example of this is where a group contains a central employing company which holds the service contracts of all group employees.

Relevant business requirements not satisfied

In the unlikely event that the above requirements are not satisfied, the statutory deduction is not available to any company.

Any tax deductions for the costs of providing the shares to employees must be considered under general tax principles. For companies carrying on a trade or property business, general tax principles include:

  • the requirement that deductions are only allowable for expenditure which is wholly and exclusively for the purposes of the company’s trade or business (see BIM37000 onwards), which may not be the case if the business for the purposes of which the share options were granted or share awards were made is not being carried on by the employing company;
  • the anti-avoidance legislation for employee benefit trusts if the shares are being provided to employees through such a trust or other third party. See BIM44500 onwards.