MTT21260 - Calculating the effective tax rate: Adjusted profits: Stock-based compensation election

A group may elect to adjust the amount of stock-based compensation that is included in the adjusted profits for the members in the territory subject to the election.

Where an election is made, the amount of any expense for stock-based compensation in the underlying profits of a member in the territory will be substituted for the amount that was allowed as a deduction for tax purposes for the same expense.

In some cases, an expense reflected in the adjusted profits in a previous period needs to be reversed as the result of the application of the election to an expense. The reversal is achieved by an adjustment in the current period that increases the adjusted profits.

This election is a long-term election. See MTT52200 for guidance on making elections.

This election is set out in section 162 of Finance (No.2) Act 2023.

Expense arising from an expiring option

A reversal of an expense is required where, as a result of a stock-based compensation election, an expense in relation to stock-based compensation is reflected in the adjusted profits of a member and that option subsequently expires without exercise.

An adjustment must be made to increase the member’s adjusted profits for the accounting period in which the option expires. This is the case regardless of whether the election still applies for that period.

The amount of the increase will be the amount relating to that expense that had been included as an expense in the adjusted profits in a previous period.

Expense recorded prior to election

A reversal of an expense is required where some expenses in respect of stock-based compensation (the “pre-election expenses”) were recorded in the member’s underlying profits in a period prior to the election having effect, and the sum of the pre-election expenses is greater than what the sum would have been had the election applied to those expenses.

The excess pre-election expenses must be included in the adjusted profits of the member as if it were income. They are to be included in the first period in which an adjustment is made, as a result of the election, in respect of the amount of stock-based compensation.

Election revoked before all stock-based compensation fully paid

A reversal of an expense is required where:

  • the underlying profits of a member are adjusted as a result of a stock-based compensation election,
  • the election is revoked before all of the stock-based compensation has been paid, and
  • the sum of expenses reflected in the adjusted profits as a result of the election is greater than the sum of the financial account expense accrued that has been paid by the last day of the last period for which the election applies.

The excess expenses must be included in the adjusted profits of the member as if it were income. They are to be included in the first accounting period for which the election does not apply.