This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

VAT Input Tax

Specific issues: employee share incentive schemes

There are a number of different types of schemes in existence. These include schemes in which:

  • shares are simply given to employees
  • employees buy shares and these are matched with free shares given by the employer
  • employees are given share options

The common purpose behind all schemes is that they increase loyalty to the employer and motivate the employees to work harder.

Under a Share Incentive Plan the employer sets up a trust to administer the scheme. This means his employees can get tax benefits provided the shares are held for a certain period.

Once the scheme has been established the trustees become responsible for paying the expenses. These might include registrar fees, stationery, the printing of share certificates, dividend warrants and scheme booklets. The trustees should instruct the suppliers to address their invoices to the employer. The employer can then treat the tax as their input tax before recharging the balance to the scheme. Where the employer is making exempt supplies they may need to restrict their recovery of input tax. See PE Partial Exemption.

Trustees can be instructed to sell shares on behalf of the employee who owns them. The trustees pay the employee the net proceeds after deduction of any selling expenses. Any VAT incurred on the selling expenses should not be claimed as input tax by the employer. Instead the tax should be born by the employee.