CFM96656 - Interest restriction: alternative calculations: interest allowance (alternative calculation) election: employee share acquisitions

TIOPA10/S425

The default approach for calculating group-interest and group-EBITDA is based closely on the amounts recognised in the group’s financial statements. Where, however, the group has made an interest allowance (alternative calculation) election, certain adjustments are made to the default approach to align the calculations more closely with the UK tax rules.

One such adjustment that is made under this election is that the amounts are included in respect of employee share schemes are based on the tax relief available, or which would be available, under the UK tax rules.

Background

The Corporation Tax rules contain special rules which provide relief in respect of employee share schemes. There are different rules for Share Incentive Plans (SIPs) and other employee share schemes.

For Share Incentive Plans (SIPs) companies will typically obtain relief under CTA09/PT11 for the costs of setting up the scheme, the running costs of the scheme and the cost of making contributions into the plan.

For other employee share schemes companies will typically obtain relief under CTA09/PT12 as follows:

  • Where qualifying shares are provided directly to the employee, the amount of relief is the difference between the market value of the shares at the time they are acquired by the employee and the value of any consideration given to the company for them.
  • Where qualifying shares are provided under an option, the relief is the difference between the market value of the shares at the time the shares are acquired by the employee under the option and the value of any consideration given for them.

Effect of the election

Under the interest allowance (alternative calculation) election, the employee share scheme numbers are adjusted by:

  • Removing any amounts from the group’s financial statements in respect of employee share acquisition arrangements; and
  • Instead reducing the group’s profit before tax by a just and reasonable amount to reflect the total of relief available, or which would be available, to the employers under the share scheme rules.

The reference to ‘employee share acquisition arrangements’ means arrangements in respect of which the corporation tax treatment is determined under CTA09/PT11 or PT12, or would be so determined if the employer company was within the charge to corporation tax.

Example

A group operates a share option scheme for their employees. In calculating the group-EBITDA figure for the group, any amounts in respect of the employee share scheme should be removed. This should include the expense recognised in respect of the share options at the time they are granted based on the fair value of the options at that time.

The total amount of tax relief that would be available to the employers in respect of share options should be deducted from the group’s profit before tax for the period. This will typically be at the time they are exercised, based on the difference between the market value of the shares on exercise and the option exercise price.