Many listed and some unlisted companies, whether UK or inbound, will meet the conditions to claim a statutory UK Corporate Tax deduction in relation to their employee share plans. There are a number of conditions to be met to claim this deduction, with one of the most important being that the employee actually acquires shares. Many companies now net settle their awards i.e. the share award is settled partly in shares and partly in cash, with the cash being used to fund the taxes due. This can restrict the statutory deduction the company can claim as employees acquire less shares. Companies should consider the impact of net settlement on their current and historic corporate tax deductions in the UK and how these share awards should be reported on their ERS annual returns.
From a transfer pricing perspective, HMRC have allowed flexibility with regard to which expense is brought into the UK cost base for the purpose of determining the correct cost plus for a UK entity. UK companies are able to choose whether to take the FRS20 accounting charge (which accrue from grant) or the Part 12 / Schedule 23 tax computation deductions (which are triggered on vesting). With the growing trend of groups net settling their share awards, it is vitally important that these groups are assessing exactly how the FRS20 or Schedule 23 charge has been calculated (on a net or gross basis) in order to ensure this truly reflects the number of shares issued and a fair return on their costs is achieved.