Supreme Court overrules HMRC on GAAP

In HMRC v NCL Investments Limited and another [2022] UKSC9, the Supreme Court found that the costs of issuing share options through an Employee Benefit Trust (EBT) were deductible under specific accounting rules, despite the fact that the costs had been recharged around group companies.

• In the three years ended 30 April 2012, NCL and Smith & Williamson granted share options over shares in their group holding companies to employees who were made available to other group companies. The options were granted through EBTs which held the relevant shares.
• International Financial Reporting Standard (IRFS)2 required that an expense debit was shown in the appellants’ accounts in respect of the share schemes, even though the costs were recharged to other group companies.
• HMRC denied tax relief for the expense debits in the following ways:
  • The costs were recharged so were not met by the group holding companies.
  • They were not incurred Wholly and Exclusively for the trade of the group holding companies.
  • Tax legislation blocked the deduction.
  • The expenses were capital.

The Supreme Court endorsed the Court of Appeal decision which in turn agreed with the decisions of the Upper Tribunal and First Tier Tribunal respectively, finding that HMRC was wrong. The deduction was allowable for tax purposes as:

• The inclusion of the debit, which was calculated and included in the accounts under Gererally Accepted Accounging Practice (IFRS2), should also be included in calculating the profits for corporate tax pending any further provisions to the contrary.
  • They were required by IFRS2 to reflect the companies’ use of the services provided by their employees, who were in part remunerated by the grant of the share options.
  • This was the case regardless of whether the companies were paying for the grant of the options or not. The fact that they were paying for the grant, albeit by way of a recharge, showed that the companies had a purpose in making the debits which went beyond complying with GAAP and was solely for the purpose of their trades.
• 1038 CTA 2009 which blocks deductions for costs directly relating to the provision of shares did not apply.
• 1290 CTA 2009, which denies a Corporation Tax deduction for contributions to EBTs until benefits are actually provided to (specific) employees, did not apply. The grant of the share options was not an employee benefit contribution when taken in context rather than applying the legislation literally as HMRC sought to do.
• The debits were incurred wholly and exclusively for the companies’ trades, those trades being the provision of their employees' services to other group companies at a profit.
• The expenses were not of a capital nature.

Useful guides on this topic

Employment-Related Securities & share schemes
This guide explains the tax consequences when a company gives shares to an employee or director and will assist you in designing share schemes.

Court of appeal opts to allow deductions for EBT share scheme (Court of Appeal decision)
In HMRC v NCL Investments Limited, Smith & Williamson Corporate Services Limited [2020] EWCA Civ 663, the Court of Appeal dismissed HMRC’s appeal finding that the costs of issuing share options through an Employee Benefit Trust (EBT) were deductible.

Costs of options incurred as an expense under IFRS2 (UT decision)
Co In HMRC v NCL Investments Limited, Smith & Williamson Corporate Services Limited v HMRC [2019] UKUTT0111 the Upper Tribunal confirmed that the grant of share options by an employee benefit trust was deductible as a trading expense under IFRS2.sts of options incurred as an expense under IFTS2.

GAAP trumps HMRC (FTT decision)
In NCL Investments Limited, Smith & Williamson Corporate Services Limited  v HMRC [2017] TC05949 the First Tier Tribunal (FTT) held that a corporation tax deduction was available in respect of accounting entries arising under IFRS2 from various employee share schemes.

External links

HMRC v NCL Investments Limited and another [2022] UKSC9