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Corporation tax deductions in the context of employee share schemes

In the recent case of HMRC v NCL, the Court of Appeal (COA) dismissed HMRC’s appeal against an earlier decision by the Upper Tribunal (UT) in 2019, that IFRS2 debits were deductible for corporation tax purposes.


The appellants granted share options to their employees which were provided to other members of the group. An employee benefit trust (EBT) was used to hold shares in the company that would be used to satisfy the options. The appellants were required under IFRS2 to ensure that an expense debit was shown in the accounts. HMRC repeatedly denied the tax relief in the accounts.


In dismissing the appeal, the COA stated that the UT had been correct in its approach of interpreting the legislation.

Amongst other submissions, HMRC argued that the IFRS2 debits were items of a capital nature, rather than revenue and so not deductible and that the requirement that the debits must be expenditure incurred ‘wholly and exclusively for the purposes of the trade’ was not met.

The COA rejecting the submissions held that the debits were clearly revenue in nature and that it was possible to access the ‘wholly and exclusively’ test by examining the underlying reasons for the debit and concluded that the debit was incurred wholly and exclusively for the trade. The debits were required by IFRS 2 to reflect the consumption by the taxpayers of the services provided by the employees, who were in part remunerated by the grant of the options. The taxpayers consumed those services wholly and exclusively for the purposes of their trades, being the provision of their employees’ services to other group companies at a profit.


The corporation tax legislation dealing with share based payments (SBP) was changed for accounting periods ending on or after 30 March 2013 and therefore the decision itself is only likely to affect companies which claimed for IFRS2 debits in earlier accounting periods which are still subject to challenge by HMRC.

The intended purpose of the legislation is to prevent a double deduction where corporation tax relief is available. However, this double preventive measure applies where the relief is available and in instances where this is not the case, it could be argued that SBP expenses can be claimed.

This clear decision cuts through a lot of foggy thinking and is to be welcomed but it is unlikely to have an impact directly on the implementation of new schemes. However, by demonstrating the centrality of the accounting principles it may send out ripples that will in time effect share schemes. For example, it may add weight to the building pressure for valuations for tax and accounting purposes to become more closely aligned and be led by the accounting principles.