Specific deductions: employee share schemes: providing shares to employees: qualifying shares: amount of deduction for acquisition periods
S272, S273 Taxation of Chargeable Gains Act 1992, S1010, S1011, S1018, S1019 Corporation Tax Act 2009
Deductions in respect of qualifying shares are given for the period in which the employee acquires the beneficial ownership of the shares (the ‘acquisition period’).
Unrestricted and non-convertible shares
The amount of the deduction given for the acquisition period is, for unrestricted and non-convertible shares:
- the market value of the shares at the date the employee acquires the shares;
- any consideration given for the acquisition of the shares by the employee;
- if the shares are being acquired by exercising a share option, any consideration given by the employee for the acquisition of the share option;
- any amount already given, for the costs of providing the shares to the employees, as a deduction in computing any company’s taxable profits for an accounting period before the introduction of the qualifying shares rules (i.e. accounting periods beginning before 1 January 2003).
In practice (a) - (b) - (c) will be broadly equivalent to the amount on which the employee is chargeable to income tax in respect of the acquisition of the shares, or would be chargeable if there were no exemptions from Income Tax.
Market value for this purpose means the price that the shares might reasonably be expected to fetch on a sale in the open market.
For the purposes of (b) and (c) above, the consideration given for the acquisition of the shares or the share option by the employee does not include services provided by the employee in performing the duties of their employment with the employing company. Nor does it include any consideration given for the acquisition of the shares by any previous holder of the shares (for example the trustees of an employee share ownership trust from whom the employee may have acquired the shares).
Restricted and/or convertible shares
For restricted and/or convertible shares, the amount of the deduction given in respect of these shares for the ‘acquisition period’ is:
- the amount which is taxable as earnings from the employee’s employment in respect of the acquisition of the shares;
- any amount already given, for the costs of providing the shares to the employees, as a deduction in computing any company’s taxable profits for an accounting period beginning before 1 January 2003.
The qualifying shares rules were introduced with effect for accounting periods beginning on or after 1 January 2003 and originally included special rules for ‘forfeitable shares’. For such shares acquired before 16 April 2003 no deduction was given for the acquisition period, even if an employment Income Tax charge arose in respect of the acquisition. Forfeitable shares acquired on or after 16 April 2013 fall within the category of ‘restricted shares’.
For additional relief in post-acquisition periods for restricted and convertible shares (and forfeitable shares), see BIM44360 onwards.
Deductions given for earlier periods
In practice reducing the amount allowable by deductions already given for periods before the introduction of the qualifying shares rules is a transitional measure which is now unlikely to be met frequently in practice. Under typical share option schemes, options become exercisable three, five or seven years after they were granted. Deductions before the introduction of the qualifying shares rules were based on generally accepted accounting practice.
If the amounts allowed for tax purposes for earlier periods exceed the gross amount allowable under the qualifying shares rules, that deduction is reduced to nil.
Income Tax position of the employee
It is one of the key requirements for the availability of relief in respect of qualifying shares that the employee is chargeable to Income Tax, or would be but for certain exemptions, in respect of the acquisition of either the shares themselves or the share option used to acquire the shares. Guidance on this key requirement is at BIM44320. In practice there will be very few circumstances in which the required income tax position of the employee will not be satisfied.