Share-based payment rules

Primarily affecting listed companies, share-based payment charges have come under close scrutiny from a number of accountants and advisors. Companies are required to make a charge in the profit and loss account based on the value of share options granted and the charge is spread over the vesting period (lifetime of the option). While these charges have the effect of reducing profits they have no impact on the company’s tax liability. Instead, the company can generally claim a corporation tax deduction when the options are exercised.

That’s the theory, anyway. In practice, it’s by no means certain that a tax deduction will be available. In current market conditions, many companies are finding that their share options are ‘underwater’ and therefore may never be exercised. Additionally, some options may have lapsed as certain imbedded criteria have not been met. In such cases, the employer has little chance of securing a deduction.

Against this background, some advisors have been arguing that businesses should be able to claim a corporation tax deduction when the share-based payment charge is made as it represents part of the employee remuneration costs. This is based on the principle that (in the absence of a statutory prohibition) the corporation tax treatment should follow that adopted in the accounts.

While such an approach may sound attractive, our view is that HMRC will resist any deductions based on this argument on a number of technical grounds. However, where it can be shown that there is little prospect of obtaining a statutory corporation tax deduction, then there may be more scope for at least considering a claim for the accounts charge.