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HMRC internal manual

Business Income Manual

Specific deductions: employee share schemes: providing shares to employees: non-qualifying shares: through global share schemes: tax case

Waterloo plc v CIR [2001] SpC301

This case pre-dates the introduction of the ‘qualifying shares’ legislation. The principles established now apply only where the trust is used to provide employees with ‘non-qualifying shares’.

Waterloo plc established a trust in connection with its employee share option scheme and made an interest free loan to the trustees so that they could purchase shares and grant options in respect of those shares to employees of Waterloo’s subsidiaries. When options were exercised the employees paid the option price to the trustees who then repaid the loan. Waterloo also undertook to issue shares to the trustees at the option price so that options could be satisfied in the event that the trustees exhausted their reserve of shares.

The Special Commissioners found that there was a business facility which ‘was more than the grant of interest free loans by Waterloo to the trustee; what Waterloo gave was the total facility for giving benefits to employees in the form of options’. Waterloo devised, set up, funded and operated a facility whereby the employees of its subsidiary companies were able to receive valuable share options. The facility was not just the making of the interest free loan, nor was it just the selling of shares to employees at a price below market value. The facility was the total package.

Following the Special Commissioners’ analysis of the nature of the facility provided by the parent company in the Waterloo case, an intra-group recharge is not capital expenditure and will be wholly and exclusively for the purposes of the subsidiary’s trade if it relates to employees who work exclusively for it.

Transfer pricing

The Special Commissioners’ decision in Waterloo plc established that where a parent company allows the employees of its subsidiaries to participate in its share schemes, the arm’s length principle requires that the subsidiaries be treated for transfer pricing purposes as making a contribution to the parent.

Guidance on acceptable methods for pricing the facility provided, for transfer pricing purposes, is at INTM42100 onwards.