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HMRC internal manual

Business Income Manual

Specific deductions: employee share schemes: providing shares to employees: non-qualifying shares: through an employee benefit trust: whether contributions deductible

Employers’ contributions to employee share ownership trusts used to provide employees with ‘non-qualifying shares’ are allowable deductions (at some time) unless they are:

  • capital expenditure, or
  • not wholly and exclusively for the purposes of the employer’s trade.

Capital or revenue expenditure

General guidance on the capital / revenue divide is at BIM35000 onwards. Decided tax cases show that there is nothing inherently capital about making contributions to employee share ownership trusts after they have been set up.

However, the contributions paid by the employer will be capital expenditure if the terms of the trust deed show that they have not been alienated entirely from the employer. This was the case in Rutter v Charles Sharpe & Co Ltd [1979] 53TC163 where there was provision for shares to be sold by the trustees and the proceeds paid to the company. It was held that each payment made to the trustees gave rise to a corresponding asset of a durable nature and so all of the employer’s contributions were on capital account.

Wholly and exclusively

General guidance on whether expenditure satisfies the ‘wholly and exclusively’ requirement is at BIM37000 onwards. Whether employers’ contributions to employee share ownership trusts are wholly and exclusively for the purposes of the employer’s trade, and serve no other purpose, will depend on the facts of each case. Cases in which there may be most doubt about this will be close companies where directors who are also shareholders may be able to benefit from the trust.

The Special Commissioners’ decision in Mawsley Machinery Ltd v Robinson [1998] SpC170 is an example of a contribution to an employee share ownership trust which was not wholly and exclusively for the purposes of the company’s trade The company was substantially owned by one shareholder/director. There was evidence that one of the purposes (indeed the primary purpose) for funding the trust was to purchase his shares in the run up to his retirement.

More detailed information about the tax case law in this area is at BIM44458.