What are your options? NCL Invstms & Anor v HMRC | KPMG | UK
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What are your options? NCL Investments & Anor v HMRC

What are your options? NCL Invstms & Anor v HMRC

In the recent case of NCL Investments Limited & Anor v HMRC, the First-Tier Tax Tribunal found that the accounting expense relating to the grant of share options to their employees was deductible for corporation tax purposes.


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This decision will be of interest to employers who claimed corporation tax deductions in earlier accounting periods in respect of ‘underwater’ share options that were not exercised, and for those who had those claims challenged by HMRC.

The appellants were subsidiaries of Smith & Williamson Holdings Limited (SWHL) which employed staff and made them available to other companies in the group for a fee.

In 2003, SWHL established an employee benefit trust (EBT) to facilitate, inter alia, awards under various share schemes. The share schemes relevant to this appeal operated broadly as follows:

  • When a decision was made to grant options to a particular employee (of the appellant), the option was granted by the EBT.
  • The option entitled the holder to acquire a certain number of shares in SWHL at a specified price and subject to the employee meeting certain “vesting” conditions.
  • The EBT would then acquire shares in SWHL to satisfy its obligations if and when an option was exercised. 

Notwithstanding the fact that the options were granted by the EBT, the relevant accounting standard, IFRS 2, required the appellants to record an expense (debit) in their P&Ls and corresponding capital contributions (credit) from SWHL.

This treatment under IFRS 2 was not without controversy when originally introduced and, while the judgment gives an in-depth explanation of the rationale behind IFRS 2, for this article it suffices to say that: 

  • The recognition of an expense was required because although the appellants did not expend cash or assets, they did consume the resource (the employees’ services) in generating income; and
  • The recognition of a capital contribution was required as the arrangement by which the options were granted was akin to a capital contribution to the appellants by SWHL.    

The amount of the expense to be posted to the P&L each year during the vesting period was calculated by taking the fair value of the options granted, multiplying that by the percentage of options that were actually expected to vest and dividing that by the number of years in the vesting period.

Importantly, in this case where options vested but were not subsequently exercised, IFRS 2 required no adjustment to the financial statements. Consequently, in the case of “underwater” options, financial statements would show a legitimate IFRS 2 expense but with no “real” monetary cost to the company.

HMRC therefore sought to disallow the expense for tax purposes. Before the First-Tier TaxTribunal (FTT) they presented four different arguments and we deal with each in turn:

Not wholly and exclusively incurred

HMRC sought to argue the IFRS 2 expense had not actually been “incurred” as it was an “accounting fiction” and so could not in fact have incurred wholly and exclusively for the purposes of the trade. The FTT rejected this interpretation of “incurred” as being at odds with the scheme of the legislation. The judgment indicated however the result may have been different under the old requirement (prior to the CTA 2009 rewrite) for money to be “laid out or expended” contained in s74 ICTA 1988.

Turning to the question of wholly and exclusively, the FTT found the IFRS 2 expense recorded in the P&L was meant to represent the value of the employees’ services being consumed in the appellants’ trades in return for the grant of options. As such, the FTT found that the expenses were wholly and exclusively incurred.

Interestingly, for periods prior to 2013, the Tribunal Judge notes that his findings imply a deduction may potentially be available both when options are granted and, under Part 12 of CTA 2009, if shares are acquired on exercise of options.

Capital or revenue in nature

The FTT dispatched of this argument in four paragraphs largely for the same reason they found the IFRS 2 expense to be wholly and exclusively incurred for the purposes of the trade.

S1038 CTA 2009

At the relevant time, s1038 provided that no relief was to be available for “expenses directly related to the provision of the shares” if relief was also available under Part 12 CTA 2009.

The FTT concluded that relief under Part 12 does not become available until options are exercised and shares acquired. The FTT also decided that the IFRS 2 expense was solely related to the grant of options and was not directly related to the provision of shares. Consequently, s1038 was not in point.

S1290 CTA 2010

The final argument presented by HMRC was that the grant of options constituted the making of an employee benefit contribution. If this were found to be correct then the deduction would be disallowed. The FTT decided however, that HMRC’s argument was not consistent with the purpose of s1290 CTA 2010 as the options “embodied contractual rights that employees held in their own names, absolutely”.

The appeal was upheld. We now expect HMRC to appeal in turn.

Next Steps

Please do not hesitate to get in touch with your normal contact or e-mail employersclub@kpmg.co.uk


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